SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended
MARCH 31, 2002
ORBITAL SCIENCES CORPORATION
Commission file number 1-14279
DELAWARE 06-1209561
(State of Incorporation) (IRS Identification number)
21839 ATLANTIC BOULEVARD
DULLES, VIRGINIA 20166 (703) 406-5000
(Address of principal executive offices) (Telephone number)
The registrant has (1) 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, and
(2) has been subject to such filing requirements for the past 90 days.
As of May 1, 2002, 43,055,842 shares of the registrant's common stock were
outstanding.
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,044 $ 63,215
Restricted cash and cash equivalents 10,547 10,815
Receivables, net 128,079 125,538
Inventories, net 20,931 21,627
Other current assets 4,135 3,403
--------- ---------
TOTAL CURRENT ASSETS 224,736 224,598
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 89,204 88,795
GOODWILL, net 109,088 109,088
OTHER NON-CURRENT ASSETS 13,091 10,253
--------- ---------
TOTAL ASSETS $ 436,119 $ 432,734
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 101,845 $ 103,710
Accounts payable and accrued expenses 129,845 160,386
Deferred revenues 26,761 23,886
--------- ---------
TOTAL CURRENT LIABILITIES 258,451 287,982
--------- ---------
LONG-TERM OBLIGATIONS, net of current portion 29,172 4,665
OTHER NON-CURRENT LIABILITIES 4,904 5,216
ALLOCATED LOSSES OF AFFILIATE IN EXCESS OF COST OF INVESTMENT 40,586 40,586
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01; 10,000,000 shares authorized, none outstanding -- --
Common Stock, par value, $.01; 80,000,000 shares authorized, 42,806,127 and
41,240,870 shares outstanding, respectively 428 412
Additional paid-in capital 545,771 539,458
Accumulated deficit (443,193) (445,585)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 103,006 94,285
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,119 $ 432,734
========= =========
See accompanying notes to condensed consolidated financial statements.
1
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE QUARTERS ENDED
MARCH 31,
-------------------------------
2002 2001
--------- ---------
REVENUES $ 120,712 $ 94,889
Costs of goods sold 100,767 84,242
--------- ---------
GROSS PROFIT 19,945 10,647
Research and development expenses 1,706 1,667
Selling, general and administrative expenses 13,038 11,918
Amortization of goodwill -- 1,575
--------- ---------
INCOME (LOSS) FROM OPERATIONS 5,201 (4,513)
Interest expense (3,025) (9,023)
Other income, net 216 608
Allocated share of losses of affiliate -- (9,764)
--------- ---------
Income (loss) before provision for income
taxes and discontinued operations 2,392 (22,692)
Provision for income taxes -- --
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,392 (22,692)
Income from discontinued operations -- 1,125
--------- ---------
NET INCOME (LOSS) $ 2,392 $ (21,567)
========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.06 $ (0.60)
Income from discontinued operations -- 0.03
--------- ---------
Net income (loss) $ 0.06 $ (0.57)
========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $ 0.05 $ (0.60)
Income from discontinued operations -- 0.03
--------- ---------
Net income (loss) $ 0.05 $ (0.57)
========= =========
See accompanying notes to condensed consolidated financial statements.
2
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
FOR THE QUARTERS ENDED
MARCH 31,
-------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 2,392 $(21,567)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Income from discontinued operations -- (1,125)
Depreciation and amortization 4,024 5,565
Allocated share of losses of affiliate -- 9,764
Changes in assets and liabilities and other (24,858) (37,177)
-------- --------
Net cash used in continuing operations (18,442) (44,540)
Net cash used in discontinued operations -- (10,428)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (18,442) (54,968)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,144) (3,455)
-------- --------
Net cash used in continuing operations (4,144) (3,455)
Net cash provided by discontinued operations -- 4,931
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,144) 1,476
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings -- 729
Principal payments on long-term obligations (2,357) (1,606)
Net proceeds from issuances of long-term obligations 22,364 30,000
Net proceeds from issuances of common stock 408 80
-------- --------
Net cash provided by continuing operations 20,415 29,203
Net cash used in discontinued operations -- (7,868)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,415 21,335
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,171) (32,157)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63,215 45,076
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 61,044 $ 12,919
======== ========
See accompanying notes to condensed consolidated financial statements.
3
ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION AND LIQUIDITY
Orbital Sciences Corporation (together with its subsidiaries, "Orbital"
or the "company"), a Delaware corporation, is a space technology company that
designs, manufactures, operates and markets a broad range of affordable space
systems, including launch vehicles, satellites and related space systems and
electronic systems.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. However, with
the exception of the first quarter of 2002, the company reported losses from
operations and net losses from continuing operations for the past several years.
In addition, the company's March 31, 2002 cash balance, operating cash flow and
available borrowing capacity in 2002 will be insufficient to repay the
outstanding subordinated convertible notes that become due on October 1, 2002,
as discussed below. The company's accumulated deficit was $443.2 million as of
March 31, 2002. The financial statements do not include any adjustments relating
to the recoverability of assets and classification of liabilities that might be
necessary should the company be unable to continue as a going concern. The
company's continuation as a going concern is dependent upon its ability to
restructure its outstanding subordinated notes, meet its 2002 cash flow plan and
comply with the terms of its new credit facility.
The company's liquidity has been and continues to be constrained. To
meet the company's capital and operating requirements, the company sold its
interests in four businesses in 2001 and used a substantial amount of the
proceeds from these divestitures to reduce debt. The company is also considering
the sale of additional non-core assets. In addition, during 2001, the company
consolidated certain business operations, reduced its workforce and implemented
other cost-cutting measures. As of March 31, 2002, the company had $61.0 million
of unrestricted cash and cash equivalents. On March 1, 2002, Orbital entered
into a new three-year primary credit facility, which includes (i) a $25 million
term loan and (ii) a $35 million revolving line of credit facility (see Note 9).
The company's $100 million subordinated convertible notes become due on
October 1, 2002. The company is exploring various alternatives in order to repay
or restructure these notes. These alternatives include seeking to raise
additional equity capital and/or debt in order to repay the notes or pursuing an
exchange offer whereby the company would make an offer to the noteholders to
exchange the notes for new debt and/or equity securities. There can be no
assurance that the company will successfully raise enough capital in order to
repay the notes, nor can there be any assurance that an exchange offer on terms
acceptable to the company can be implemented and accepted by the company's
existing noteholders. A default by the company on
4
the subordinated convertible notes would also result in a default on the
company's new primary credit facility described above.
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 have been condensed or omitted pursuant to instructions, rules and
regulations prescribed by the 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, 2001.
Operating results for the quarter ended March 31, 2002 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 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.
Certain reclassifications have been made to the 2001 financial
statements and footnote disclosures to conform to the 2002 financial statement
presentation. All financial amounts are stated in U.S. dollars unless otherwise
indicated.
(3) DISCONTINUED OPERATIONS
The company reclassified its condensed consolidated statements of
operations and cash flows for the quarter ended March 31, 2001 to report the
results of operations and cash flows of divested businesses as discontinued
operations.
(4) INDUSTRY SEGMENT INFORMATION
Orbital designs, manufactures, operates and markets a broad range of
space-related products and services that are grouped into three reportable
segments: (i) launch vehicles and advanced programs, (ii) satellites and related
space systems and (iii) electronic systems. Reportable segments are generally
organized based upon product lines. Corporate and other includes certain
corporate office general and administrative expenses that have not been
attributed to a particular
5
segment and, for the quarter ended March 31, 2001, corporate office general and
administrative expenses related to discontinued operations.
Intersegment sales are generally negotiated and accounted for under
terms and conditions that are similar to other commercial and government
contracts. There were no significant sales or transfers between segments.
The following table presents operating information for the quarters
ended March 31, 2002 and 2001 and identifiable assets at March 31, 2002 and
December 31, 2001 by reportable segment (in thousands).
QUARTERS ENDED MARCH 31,
--------------------------------
2002 2001
----------- ------------
LAUNCH VEHICLES AND ADVANCED PROGRAMS:
Revenues $ 44,701 $ 29,841
Operating income (loss) 4,160 (464)
Identifiable assets 112,624 114,403(1)
Capital expenditures 1,138 468
Depreciation and amortization 1,420 1,925
SATELLITES AND RELATED SPACE SYSTEMS:
Revenues $ 60,828 $ 51,670
Operating income (loss) 100 (1,831)
Identifiable assets 138,065 132,047(1)
Capital expenditures 2,537 1,635
Depreciation and amortization 1,189 2,134
ELECTRONIC SYSTEMS:
Revenues $ 16,007 $ 14,934
Operating income (loss) 1,240 220
Identifiable assets 65,647 66,749(1)
Capital expenditures 142 160
Depreciation and amortization 210 544
CORPORATE AND OTHER:
Revenues $ (824) $ (1,556)
Operating income (loss) (299) (2,438)
Allocated share of losses of affiliate -- (9,764)
Identifiable assets 119,783 119,535 (1)
Capital expenditures 327 1,192
Depreciation and amortization 1,205 962
CONSOLIDATED:
Revenues $ 120,712 $ 94,889
Operating income (loss) 5,201 (4,513)
Allocated share of losses of affiliate -- (9,764)
Identifiable assets 436,119 432,734 (1)
Capital expenditures 4,144 3,455
Depreciation and amortization 4,024 5,565
- -------------------
(1)Identifiable assets as of December 31, 2001
6
(5) INVENTORIES
Inventories consisted of the following (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
Components and raw materials $ 11,820 $ 10,622
Work-in-process 10,738 12,395
Allowance for inventory obsolescence (1,627) (1,390)
-------- --------
Total $ 20,931 $ 21,627
======== ========
(6) EARNINGS PER SHARE
The following table presents the shares used in computing basic and
dilutive earnings per share ("EPS") for the first quarter of 2002:
Weighted average of outstanding shares for basic EPS 42,170,322
Dilutive effect of outstanding stock options and warrants 1,562,978
----------
Shares for diluted EPS 43,733,300
==========
In periods of losses from continuing operations, such as the first
quarter of 2001, fully diluted per-share losses are the same as basic per-share
losses. The weighted average of outstanding shares used to compute per share
amounts in the first quarter of 2001 was 37,745,045.
(7) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) and associated differences are as follows
(in thousands):
QUARTERS ENDED
MARCH 31,
----------------------
2002 2001
-------- --------
COMPUTATION OF COMPREHENSIVE INCOME (LOSS):
Net income (loss), as reported $ 2,392 $(21,567)
Translation adjustments -- (721)
Unrealized gains on investments -- (546)
-------- --------
Comprehensive income (loss) $ 2,392 $(22,834)
======== ========
ACCUMULATED DIFFERENCES BETWEEN NET INCOME
(LOSS), AS REPORTED, AND COMPREHENSIVE LOSS:
Beginning of period $ -- $ (7,152)
Translation adjustments -- (721)
Unrealized gains on investments -- (546)
-------- --------
End of period $ -- $ (8,419)
======== ========
(8) INVESTMENTS IN AND TRANSACTIONS WITH ORBIMAGE
The company uses the equity method of accounting for its ownership
interest in Orbital Imaging Corporation ("ORBIMAGE"). In the first half of 2001,
the company recognized 100% of ORBIMAGE's losses, including preferred stock
dividends, in allocated share of losses of affiliate in the accompanying
statements of operations. During 2001, such losses exceeded the company's
investment in ORBIMAGE. The company ceased recognizing ORBIMAGE losses as
7
of July 1, 2001. As of March 31, 2002 and December 31, 2001, recognized losses
exceeded the company's investment in ORBIMAGE by $40.6 million and such amount
is reported as "allocated losses of affiliate in excess of cost of investment"
on the accompanying consolidated balance sheets. The disposition of the $40.6
million balance is dependent upon the future of ORBIMAGE as an entity, and could
include, among other outcomes, a full or partial reversal of this balance from
future earnings of ORBIMAGE or, in the event that ORBIMAGE were to restructure
through bankruptcy or liquidate and dissolve, the remaining balance would be
reversed at that time.
In April 2002, ORBIMAGE filed a voluntary petition of reorganization
under Chapter 11 of the U.S. Federal Bankruptcy Code in the Eastern District of
Virginia and is currently negotiating a plan of reorganization with its major
creditors and shareholders, including Orbital. There can be no assurance that a
consensual plan of reorganization will be successfully negotiated, in which case
Orbital could be subject to litigation brought by ORBIMAGE, its other
shareholders and/or its creditors.
Under a fixed-price procurement contract between Orbital and ORBIMAGE,
Orbital has produced and launched ORBIMAGE's satellites, and is continuing to
construct the OrbView-3 satellite and related launch vehicle and ground segment.
As a result of ORBIMAGE's lack of liquidity and weakened financial condition,
Orbital ceased recognizing revenues on the ORBIMAGE procurement contract in 2000
and commenced accounting for its contract with ORBIMAGE using the completed
contract method. The liabilities associated with the ORBIMAGE contract exceeded
the related assets by $12.9 million and $16.4 million as of March 31, 2002 and
December 31, 2001, respectively, and are included in accounts payable and
accrued expenses.
(9) DEBT
On March 1, 2002, Orbital entered into a three-year primary credit
facility with Foothill Capital Corporation ("Foothill") as arranger and agent.
The facility provides for total borrowings of up to $60 million, including (i) a
$25 million term loan (the "Term Loan") and (ii) a $35 million revolver (the
"Revolver"), of which up to $30 million may be available for borrowing based on
Orbital's billed and unbilled receivables. Upon closing the facility, the
company borrowed the entire $25 million available under the Term Loan, which
provided $22.4 million in net proceeds to the company after deducting
transaction fees and expenses. As of March 31, 2002, the entire Term Loan was
outstanding at an interest rate of 11%. As of March 31, 2002, there were no
borrowings under the Revolver although $5.5 million of the amount available for
borrowing was utilized for letters of credit and foreign exchange forward
contracts. Accordingly, $24.5 million of the Revolver was available for
borrowing as of March 31, 2002. The borrowings under the facility are
collateralized by all of the company's assets. As of March 31, 2002, the company
was in compliance with the loan covenants. The facility imposes restrictions on
the company's ability to refinance existing indebtedness and, accordingly,
Foothill's consent is likely to be required in order to refinance the company's
convertible notes as discussed below.
8
Orbital's $100 million of 5% convertible subordinated notes become due
on October 1, 2002, accordingly, the entire balance is reported as a current
liability. Orbital is considering alternatives with respect to the payment or
refinancing of these notes (see Note 1). A default by the company on the
subordinated convertible notes would also result in a default on the company's
new primary credit facility described above.
(10) COMMITMENTS AND CONTINGENCIES
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.
CONTRACTS
Most of the company'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.
CONTINGENCIES
As described in Note 8 above, ORBIMAGE filed a voluntary petition of
reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code and is
currently negotiating a plan of reorganization with its major creditors and
shareholders, including Orbital. There can be no assurance that a consensual
plan of reorganization will be successfully negotiated, in which case Orbital
could be subject to litigation brought by ORBIMAGE, its other shareholders
and/or its creditors. The outcome of any such litigation is uncertain.
During the second quarter of 2000, Orbital agreed to temporarily refund
$20 million to ORBIMAGE in January 2001 from amounts previously paid by ORBIMAGE
under its procurement agreement with Orbital, provided, however, that such
obligation would be terminated if Orbital were to successfully broker a
renegotiation of ORBIMAGE's then existing license agreement for worldwide
RadarSat-2 satellite distribution rights with MacDonald Dettwiler and Associates
Ltd. ("MDA") by January 2001. The then existing RadarSat-2 license agreement was
terminated in February 2001 and replaced by a new agreement between MDA and
ORBIMAGE for exclusive U.S. RadarSat-2 distribution rights. Orbital believes
that as a result, its obligation to temporarily refund $20 million was
extinguished. ORBIMAGE has notified Orbital of its position that,
notwithstanding the renegotiation of the license agreement, the $20 million
refund is now due and payable. Orbital disputes that position.
9
In 2001, ORBIMAGE entered into a new license agreement with MDA for
exclusive U.S. RadarSat-2 imagery distribution rights. Under the new RadarSat-2
license agreement, two $5 million installments will be due from ORBIMAGE to MDA
in 2002. If ORBIMAGE is unable to make these payments to MDA, Orbital has agreed
to make such payments on its behalf in exchange for receivables from ORBIMAGE in
an amount equal to the payments, to the extent that receivables are available.
There can be no assurance that ORBIMAGE's receivables will be collectible.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," was issued in June 2001. Under SFAS No. 142,
goodwill and other intangible assets with indefinite lives are no longer
amortized, but are reviewed at least annually for impairment. A two-step
impairment test is used to first identify potential goodwill impairment and then
measure the amount of goodwill impairment loss, if any. SFAS No. 142 is
effective for the company beginning in 2002, and is required to be applied as of
January 1, 2002. Impairment losses that arise due to the initial application of
SFAS No. 142 will be reported as a cumulative effect of a change in accounting
principle. The first step of the goodwill impairment test, which must be
completed in the first half of 2002, will identify potential goodwill
impairment. The second step of the goodwill impairment test, which must be
completed prior to the issuance of the financial statements for the year ending
December 31, 2002, will measure the amount of goodwill impairment loss, if any.
The company has not completed its analysis of the effect of adopting SFAS No.
142.
In accordance with SFAS No. 142, goodwill amortization was discontinued
as of January 1, 2002. The following table adjusts the reported loss from
continuing operations for the quarter ended March 31, 2001 and the related basic
and diluted per share amounts to exclude goodwill amortization (in thousands,
except per share amounts):
Reported loss from continuing operations $(22,692)
Goodwill amortization 1,575
--------
Adjusted loss from continuing operations $(21,117)
========
Reported loss per share from continuing operations $ (0.60)
Goodwill amortization 0.04
--------
Adjusted loss per share from continuing operations $ (0.56)
========
10
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, 2002 and 2001", "Liquidity and Capital Resources" 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, 2001, may affect our actual results and 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.
Orbital designs, manufactures, operates and markets a broad range of
space-related systems for commercial, civil government and military customers.
Our primary products include low-orbit, geosynchronous-orbit and planetary
spacecraft for communications, remote sensing and scientific missions; ground-
and air-launched rockets that deliver satellites into orbit; and missile defense
boosters that are used as interceptor and target vehicles for missile defense
systems. 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, 2002 AND
2001
Revenues - Our consolidated revenues were $120.7 million and $94.9
million in the first quarters of 2002 and 2001, respectively. Revenues increased
in the first quarter of 2002 as compared to the same period in 2001 primarily
due to substantial revenue growth in our launch vehicle business and, to a
lesser extent, our satellite and related space systems business.
Gross Profit - Our consolidated gross profit was $19.9 million and
$10.6 million in the first quarters of 2002 and 2001, respectively. Gross profit
in the first quarter of 2002 increased as compared to the same period in 2001
primarily as a result of increased revenues in our launch systems business,
increased gross profit in our satellite and related space systems business, an
improvement in profits on electronic systems contracts and the absence in 2002
of costs recorded in 2001 related to the termination of the X-34 program.
Research and Development Expenses - Research and development expenses
were $1.7 million in both the first quarter of 2002 and the first quarter of
2001. These expenses related primarily to the development of improved launch
vehicles and satellites.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $13.0 million and $11.9 million in the first
quarters of 2002 and 2001, respectively. Selling, general and administrative
expenses increased in the first quarter of 2002 as compared to the first quarter
of 2001 in part as a result of an insurance reimbursement recorded in the first
quarter of 2001 for certain prior period legal expenses and an increase in
general and administrative expenses as a result of higher contract volume in
2002.
11
Goodwill Amortization - In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, which is effective for Orbital beginning
in 2002, the amortization of goodwill was discontinued as of January 1, 2002.
Goodwill amortization expense was $1.6 million in the first quarter of 2001.
Interest Expense - Interest expense was $3.0 million and $9.0 million
for the first quarters of 2002 and 2001, respectively. Interest expense in both
the first quarter of 2002 and the first quarter of 2001 included $1.0 million
related to a vendor financing agreement. Interest expense in the first quarter
of 2001 included $2.6 million of fees related to an amendment of our prior
credit facility and $3.4 million of higher interest expense related to the prior
credit facility.
Allocated Share of Losses of Affiliate - In the first quarter of 2001,
we recognized $9.4 million, or 100% of ORBIMAGE's losses and preferred stock
dividends, as allocated share of losses of affiliate and $0.4 million of other
adjustments related to our interest in ORBIMAGE. We ceased recognizing
ORBIMAGE's losses after the second quarter of 2001.
Provision for Income Taxes - We did not record an income tax expense in
the first quarter of 2002 due to the availability of net operating loss carry
forwards. We did not record an income tax benefit in the first quarter of 2001
related to the loss for that period because such benefit could not be reasonably
assured from future operating results.
Discontinued Operations - We reported as discontinued operations net
income of $1.1 million for the first quarter of 2001 related to our divested
businesses.
Net Income (Loss) - Our consolidated income (loss) from continuing
operations was $2.4 million and ($22.7) million in the first quarters of 2002
and 2001, respectively. Net income (loss) was $2.4 million and ($21.6) million
in the first quarters of 2002 and 2001, respectively.
SEGMENT RESULTS
Our products and services are grouped into three reportable segments:
(i) launch vehicles and advanced programs, (ii) satellites and related space
systems and (iii) electronic systems. All other activities of the company, as
well as consolidating eliminations and adjustments, are reported in corporate
and other. The following table summarizes revenues and income (loss) from
operations for our reportable business segments and corporate and other (in
thousands):
12
QUARTERS ENDED MARCH 31,
-------------------------
2002 2001
--------- ---------
REVENUES:
Launch Vehicles and Advanced Programs $ 44,701 $ 29,841
Satellites and Related Space Systems 60,828 51,670
Electronic Systems 16,007 14,934
Corporate and Other (824) (1,556)
--------- ---------
TOTAL $ 120,712 $ 94,889
========= =========
INCOME (LOSS) FROM OPERATIONS:
Launch Vehicles and Advanced Programs $ 4,160 $ (464)
Satellites and Related Space Systems 100 (1,831)
Electronic Systems 1,240 220
Corporate and Other (299) (2,438)
--------- ---------
TOTAL $ 5,201 $ (4,513)
========= =========
Launch Vehicles and Advanced Programs - Revenues in this segment
increased in the first quarter of 2002 as compared to the first quarter of 2001
primarily as a result of work on a major defense contract that was awarded in
the first quarter of 2002.
Operating income for launch vehicles and advanced programs improved in
the first quarter of 2002 as compared to the first quarter of 2001 as a result
of a $2.0 million increase in launch vehicle operating income and a $2.6 million
increase in advanced programs operating income. Operating income for launch
vehicles increased in the first quarter of 2002 as compared to the same period
in 2001 as a result of the overall increase in launch vehicle revenues.
Additionally, the absence of goodwill amortization in the first quarter of 2002,
which was $0.4 million in the first quarter of 2001, contributed to an
improvement in launch vehicle operating income. Operating income for advanced
programs improved in the first quarter of 2002 as compared to the same period in
2001 primarily due to the absence in 2002 of costs incurred in the first quarter
of 2001 related to the termination of the X-34 program.
Satellites and Related Space Systems - Revenues from satellites and
related space systems increased in the first quarter of 2002 as compared to the
first quarter of 2001 largely as a result of higher revenues for our commercial
geosynchronous satellite product line. The growth in this product line is
attributable to a new geosynchronous satellite contract awarded late in the
first quarter of 2001 in addition to an order received in the second half of
2001 to build an additional satellite for an existing customer.
Operating income from satellites and related space systems increased in
the first quarter of 2002 as compared to the same period in 2001 primarily as a
result of the absence of goodwill amortization in the first quarter of 2002,
which was $0.8 million in the first quarter of 2001, and improved profitability
on commercial geosynchronous satellite contracts.
Electronic Systems - Revenues from electronic systems increased in the
first quarter of 2002 as compared to the same period in 2001 primarily as a
result of increased volume represented by several new contracts for
transportation systems.
13
Operating income from electronic systems increased in the first quarter
of 2002 as compared to the same period in 2001 primarily as a result of the
profit related to higher revenues in 2002 and the absence of goodwill
amortization in the first quarter of 2002, which was $0.4 million in the first
quarter of 2001.
Corporate and Other - Corporate and other includes the elimination of
intercompany revenues. The reduction in such eliminations in the first quarter
of 2002 as compared to the first quarter of 2001 is due primarily to the absence
of intercompany work in 2002 associated with the termination of the X-34
contract in March 2001.
Corporate and other operating loss includes expenses for corporate
general and administrative activities that are not allocated to the operating
segments. The reduction in such expenses in the first quarter of 2002 as
compared to the same period in 2001 was attributable to the absence in the first
quarter of 2002 of costs related to discontinued operations in 2001.
BACKLOG
During the first quarter of 2002, we received $407 million in new firm
orders and $553 million in new option backlog. The major contributor to our
backlog was a $900 million award, of which approximately $300 million was firm,
to supply missile defense-related vehicles under the Ground-based Midcourse
Defense Boost Vehicle missile defense contract through the end of the decade. As
a result of new orders, offset by the expiration of several contract options and
revenues recognized during the quarter, our firm and total backlog increased
from $582 million and $2.55 billion, respectively, at December 31, 2001, to $850
million and $2.63 billion, respectively, as of March 31, 2002. Firm backlog
consists of aggregate contract values for firm product orders, excluding the
portion previously included in operating revenues on the basis of percentage of
completion accounting, and including government contract orders not yet funded.
Total backlog includes firm backlog in addition to unexercised options,
indefinite-quantity contracts and undefinitized orders and contract award
selections. Backlog at March 31, 2002 does not give effect to new orders
received or any terminations or cancellations since that date.
LIQUIDITY AND CAPITAL RESOURCES
Although we had $61.0 million of unrestricted cash and cash equivalents
as of March 31, 2002, our liquidity has been and continues to be constrained. We
will not have sufficient cash to repay our $100 million subordinated convertible
notes that become due on October 1, 2002. Additionally, while we currently
expect that our cash on hand and our primary credit facility (discussed below)
will be sufficient to meet our operating and capital expenditure requirements in
2002, there can be no assurance that this will be the case.
During the first quarter of 2002, we reported net cash used in
operations of $18.4 million, which included a $25.0 million payment related to
our vendor financing agreement from a launch services provider and a $13.0
million receipt from NASA as final settlement of the termination of the X-34
contract. Our investing activities used $4.1 million for capital expenditures
for the first quarter of 2002.
14
Our financing activities provided $20.4 million during the first
quarter of 2002 primarily as a result of $22.4 million in net proceeds from
our new credit facility term loan discussed below. Additionally, we received
$0.4 million in the first quarter of 2002 from the exercise of stock options and
warrants. In August 2001, we issued warrants in connection with the settlement
of a class action lawsuit. The warrants are exercisable for up to 4,631,121
shares of common stock at an exercise price of $4.82 per share, for a period of
three years from the date of their issuance. During the first quarter of 2002, a
total of 3,054 warrants were exercised. During the first quarter of 2002, we
made $2.4 million of principal payments on capital leases and other debt.
On March 1, 2002, we entered into a three-year primary credit facility
with Foothill Capital Corporation ("Foothill") as arranger and agent. This
facility provides for total borrowings of up to $60 million, including (i) a $25
million term loan (the "Term Loan") and (ii) a $35 million revolver (the
"Revolver"), of which up to $30 million may be available for borrowing based on
our billed and unbilled receivables. Upon closing the facility, we borrowed the
entire $25 million available under the Term Loan, which provided $22.4 million
in net proceeds to us after deducting transaction fees and expenses. As of March
31, 2002, the entire Term Loan was outstanding at an interest rate of 11%. As of
March 31, 2002, there were no borrowings under the Revolver although $5.5
million of the amount available for borrowing was utilized for letters of credit
and foreign exchange forward contracts. Accordingly, $24.5 million of the
Revolver was available for borrowing as of March 31, 2002. The borrowings under
the facility are collateralized by all of our assets. As of March 31, 2002, we
were in compliance with loan covenants. The facility also imposes restrictions
on our ability to refinance existing indebtedness and, accordingly, Foothill's
consent is likely to be required in order to refinance our convertible notes as
discussed below.
Our $100 million subordinated convertible notes become due on October
1, 2002. We are considering various alternatives in order to repay or
restructure these notes. These alternatives include seeking to raise additional
equity and/or debt capital in order to repay the notes or pursuing an exchange
offer whereby we would make an offer to the noteholders to exchange the notes
for new debt and/or equity securities. We are engaged in discussions with
financial advisors regarding possible transactions. There can be no assurance
that we will successfully raise enough capital in order to repay the notes, nor
can there be any assurance that an exchange offer on terms acceptable to us can
be implemented and accepted by our existing noteholders. A default by us on the
convertible notes would also result in a default on our new primary credit
facility described above. Our ability to continue as a going concern is
contingent upon, among other factors, a successful refinancing or restructuring
of the convertible notes.
As of March 31, 2002, $24.8 million of deferred vendor payments and
accrued interest at a rate of 10.5% under a vendor financing arrangement with a
launch services provider were recorded in accounts payable. This financing
arrangement commits us to pay the entire balance prior to the launch, which is
expected to occur in the second quarter of 2002.
15
In April 2002, ORBIMAGE filed a voluntary petition of reorganization
under Chapter 11 of the U.S. Federal Bankruptcy Code and is currently
negotiating a plan of reorganization with its major creditors and shareholders,
including Orbital. There can be no assurance that a consensual plan of
reorganization will be successfully negotiated, in which case Orbital could be
subject to litigation brought by ORBIMAGE, its other shareholders and/or its
creditors.
During the second quarter of 2000, we agreed to temporarily refund $20
million to ORBIMAGE in January 2001 from amounts previously paid by ORBIMAGE
under its procurement agreement with us, provided, however, that such obligation
would be terminated if we were to successfully broker a renegotiation of
ORBIMAGE's then existing license agreement for worldwide RadarSat-2 satellite
distribution rights with MacDonald Dettwiler and Associates Ltd. ("MDA") by
January 2001. The then existing RadarSat-2 agreement was terminated in February
2001 and replaced by a new agreement between MDA and ORBIMAGE for exclusive U.S.
RadarSat-2 distribution rights. We believe that as a result, our obligation to
temporarily refund $20 million was extinguished. ORBIMAGE has notified us of its
position that, notwithstanding the renegotiation of the license agreement, the
$20 million refund is now due and payable. We dispute that position. In our
negotiation of a consensual plan of reorganization for ORBIMAGE, we are seeking
general mutual releases of all potential claims among ORBIMAGE, its various
stakeholders and Orbital.
In 2001, ORBIMAGE entered into a new license agreement with MDA for
exclusive U.S. RadarSat-2 imagery distribution rights. Under the new RadarSat-2
license agreement, two $5 million installments will be due from ORBIMAGE to MDA
in 2002. If ORBIMAGE is unable to make these payments to MDA, we have agreed to
make such payments on its behalf in exchange for receivables from ORBIMAGE in an
amount equal to the payments, to the extent that receivables are available.
There can be no assurance that ORBIMAGE's receivables will be collectible.
Certain international contracts and many of our electronic systems
contracts customarily require us to post performance bonds or letters of credit
pending completion of work. We had $13.8 million of standby letters of credit
outstanding at March 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," was issued in June 2001. Under SFAS No. 142,
goodwill and other intangible assets with indefinite lives are no longer
amortized, but are reviewed at least annually for impairment. A two-step
impairment test is used to first identify potential goodwill impairment and then
measure the amount of goodwill impairment loss, if any. SFAS No. 142 is
effective for us beginning in 2002, and is required to be applied as of January
1, 2002. Impairment losses that arise due to the initial application of SFAS No.
142 will be reported as a cumulative effect of a change in accounting principle.
The first step of the goodwill impairment test, which must be completed in the
first half of 2002, will identify potential goodwill impairment. The second step
of the goodwill impairment test, which must be completed prior to the issuance
of the financial statements for the year ending December 31, 2002, will measure
the
16
amount of goodwill impairment loss, if any. We have not completed our analysis
of the effect of adopting SFAS No. 142.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any material exposure to interest rate changes,
commodity price changes, foreign currency fluctuation or similar market risks,
although we do enter into forward exchange contracts to hedge against specific
foreign currency fluctuations on specific receivables denominated in Japanese
Yen. Accordingly, we are subject to off-balance sheet market risk for the
possibility that future changes in market prices may make the forward exchange
contracts less valuable. At March 31, 2002, the company had foreign currency
forward exchange contracts to sell a total of 1.6 billion Japanese Yen for $12.9
million. The market value of these contracts was $13.6 million as of March 31,
2002.
The fair market value of our $100 million 5% convertible subordinated
notes that are due on October 1, 2002 was $89.1 million at March 31, 2002.
We have a deferred compensation plan for senior managers and executive
officers, with a total liability balance of $4.7 million at March 31, 2002. This
liability is subject to fluctuation based upon the market value of underlying
securities.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to certain other 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 other
proceedings would have a material adverse effect on our results of
operations or financial condition.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
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 AND REPORTS ON FORM 8-K
(a) Exhibits - A complete listing of exhibits required is given in
the Exhibit Index.
(b) Reports on Form 8-K. None.
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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: May 3, 2002 By: /s/ David W. Thompson
----------------------------------
David W. Thompson
Chief Executive Officer
DATED: May 3, 2002 By: /s/ Garrett E. Pierce
----------------------------------
Garrett E. Pierce
Executive Vice President,
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 By-Laws of Orbital Sciences Corporation, as amended on July
27, 1995 (incorporated by reference to Exhibit 3 to the
company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
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 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
Report on Form 8-A filed on November 2, 1998).
10.1 Orbital Sciences Corporation 1997 Stock Option and Incentive
Plan, as amended through April 25, 2002 (transmitted
herewith).*
*Management Compensatory Plan