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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
JUNE 30, 1997
ORBITAL SCIENCES CORPORATION
Commission file number 0-18287
DELAWARE 06-1209561
-------------------------------------- ---------------------------------
(State of Incorporation) (IRS Identification number)
21700 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 August 1, 1997, 32,188,046 shares of the registrant's common
stock were outstanding.
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PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
A S S E T S
----------- JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 30,059 $ 26,859
Short-term investments, at market 4,176 5,827
Receivables, net 126,116 144,774
Inventories, net 40,864 27,159
Deferred income taxes and other assets 5,257 6,475
--------- ---------
TOTAL CURRENT ASSETS 206,472 211,094
PROPERTY, PLANT AND EQUIPMENT, AT COST, LESS ACCUMULATED
depreciation and amortization of $70,878 and $69,534, respectively 114,144 127,862
INVESTMENTS IN AFFILIATES, NET 174,696 86,524
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED,
less accumulated amortization of $17,716 and $15,972, respectively 67,980 69,512
DEFERRED INCOME TAXES AND OTHER ASSETS 11,401 9,720
--------- ---------
TOTAL ASSETS $ 574,693 $ 504,712
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings and current portion of
long-term obligations $ 62,018 $ 38,519
Accounts payable 30,848 25,789
Accrued expenses 29,797 32,372
Deferred revenue 41,115 30,741
--------- ---------
TOTAL CURRENT LIABILITIES 163,778 127,421
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 56,518 33,076
OTHER LIABILITIES 15,542 15,523
--------- ---------
TOTAL LIABILITIES 235,838 176,020
NON-CONTROLLING INTERESTS IN
NET ASSETS OF CONSOLIDATED SUBSIDIARIES (2,920) (1,810)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $.01; 10,000,000 shares authorized:
Series A Special Voting Preferred Stock, one share authorized and outstanding -- --
Class B Preferred Stock, 10,000 shares authorized and outstanding -- --
Common Stock, par value $.01; 80,000,000 shares authorized,
32,269,326 and 32,160,598 shares outstanding,
after deducting 15,735 shares held in treasury 323 322
Additional paid-in capital 324,510 323,592
Unrealized gains (losses) on short-term investments (6) 14
Cumulative translation adjustment (4,004) (3,681)
Retained earnings 20,952 10,255
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 341,775 330,502
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 574,693 $ 504,712
========= =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE THREE MONTHS ENDED
JUNE 30,
--------------------------------------
1997 1996
---------------- -----------------
REVENUES $142,226 $116,512
COSTS OF GOODS SOLD 102,553 83,624
---------------- ----------------
GROSS PROFIT 39,673 32,888
RESEARCH AND DEVELOPMENT EXPENSES 4,682 4,953
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,244 19,829
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 742 782
---------------- -----------------
INCOME FROM OPERATIONS 11,005 7,324
NET INVESTMENT INCOME (EXPENSE) 50 (814)
EQUITY IN LOSSES OF AFFILIATES (5,393) (2,586)
NON-CONTROLLING INTERESTS IN LOSSES
OF CONSOLIDATED SUBSIDIARIES 563 341
---------------- -----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,225 4,265
PROVISION FOR INCOME TAXES 622 426
---------------- -----------------
NET INCOME $5,603 $3,839
================ =================
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $0.17 $0.14
SHARES USED IN COMPUTING NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE 32,688,563 27,378,722
================ =================
NET INCOME PER COMMON SHARE, ASSUMING FULL DILUTION $0.17 $0.14
SHARES USED IN COMPUTING NET INCOME
PER COMMON SHARE, ASSUMING FULL DILUTION 32,743,578 31,303,789
================ =================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED; IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1997 1996
---------------- -----------------
REVENUES $264,338 $221,406
COSTS OF GOODS SOLD 190,987 156,206
---------------- -----------------
GROSS PROFIT 73,351 65,200
RESEARCH AND DEVELOPMENT EXPENSES 11,694 11,331
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 43,122 39,094
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 1,483 1,579
---------------- -----------------
INCOME FROM OPERATIONS 17,052 13,196
NET INVESTMENT INCOME (EXPENSE) 310 (1,449)
EQUITY IN LOSSES OF AFFILIATES (6,661) (4,604)
NON-CONTROLLING INTERESTS IN LOSSES
OF CONSOLIDATED SUBSIDIARIES 1,184 598
---------------- -----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,885 7,741
PROVISION FOR INCOME TAXES 1,188 774
---------------- -----------------
NET INCOME $10,697 $6,967
================ =================
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $0.33 $0.26
SHARES USED IN COMPUTING NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE 32,753,415 27,270,385
================ =================
NET INCOME PER COMMON SHARE, ASSUMING FULL DILUTION $0.33 $0.26
SHARES USED IN COMPUTING NET INCOME
PER COMMON SHARE, ASSUMING FULL DILUTION 32,753,689 31,260,083
================ =================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $10,697 $6,967
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization expense 12,115 11,627
Equity in losses of affiliates 6,661 4,604
Non-controlling interests in losses of consolidated subsidiaries (1,184) (598)
Loss (gain) on sale of fixed assets and investments -- (17)
Foreign currency translation adjustment (323) (415)
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in current assets and other non-current assets 1,649 (8,916)
Increase (decrease) in current and other liabilities 11,411 (20,168)
---------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 41,026 (6,916)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,656) (18,638)
Proceeds from sales of fixed assets 34,085 --
Purchases of available-for-sale investment securities (9,720) (6,222)
Sales of available-for-sale investment securities 4,720 9,576
Maturities of available-for-sale investment securities 6,631 6,215
Investments in affiliates (92,884) (12,346)
---------- --------
NET CASH USED IN INVESTING ACTIVITIES (75,824) (21,415)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of (repayments) (5,210) 30,200
Principal payments on long-term obligations (5,604) (4,114)
Net proceeds from issuance of long-term obligations 22,893 --
Proceeds from issuance of short-term bridge loan 25,000 --
Net proceeds from issuances of common stock to employees 919 1,040
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,998 27,126
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,200 (1,205)
CASH AND CASH EQUIVALENTS, beginning of period 26,859 15,317
========= ========
CASH AND CASH EQUIVALENTS, end of period $30,059 $14,112
========= ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(UNAUDITED)
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim
financial information reflects all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation thereof. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to instructions, rules and regulations prescribed by the
Securities and Exchange Commission. Although the company believes that the
disclosures provided are adequate to make the information presented not
misleading, these unaudited interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and the footnotes thereto included in the company's Annual Report on
Form 10-K for the year ended December 31, 1996. Operating results for the
three-and six-month periods ended June 30, 1997 are not necessarily indicative
of the results expected for the full year.
Orbital Sciences Corporation is hereafter referred to as "Orbital" or the
"company."
(1) Inventories
Inventories consist of components inventory, work-in-process inventory
and finished goods inventory and are generally stated at the lower of
cost or net realizable value on a first-in, first-out, or specific
identification basis.
Components inventory consists primarily of components and raw
materials purchased to support future production efforts.
Work-in-process inventory consist primarily of (i) costs incurred
under U.S. Government fixed-price contracts accounted for using the
percentage of completion method of accounting applied on a units of
delivery basis and (ii) partially assembled commercial products, and
generally includes direct production costs and certain allocated
indirect costs (including an allocation of general and administrative
costs). Work-in-process inventory has been reduced by contractual
progress payments received. Finished goods inventory consists of
fully assembled commercial products awaiting shipment.
(2) Common Stock and Income Per Share
Income per common and common equivalent share ("primary EPS") is
calculated using the weighted average number of common and common
equivalent shares, to the extent dilutive, outstanding during the
periods. Income per common share assuming full dilution
("fully-diluted EPS") is calculated using the weighted
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average number of common and common equivalent shares outstanding
during the periods. Any reduction of less than three percent in the
aggregate has not been considered dilutive in the calculation and
presentation of income per common share assuming full dilution.
Subsidiary stock options that enable holders to obtain the
subsidiary's common stock pursuant to stock option plans are included
in computing the subsidiary's earnings per share, to the extent
dilutive. Those earnings per share data are included in the company's
consolidated per share computations based on the company's holdings of
the subsidiary's stock.
(3) Income Taxes
The company has recorded its interim income tax provision based on
estimates of the company's effective tax rate expected to be
applicable for the full fiscal year. Estimated effective rates
recorded during interim periods may be periodically revised, if
necessary, to reflect current estimates.
(4) Debt
On June 13, 1997, the company issued a $13,210,000 note to a financial
institution. The note bears interest at 7.19%, subject to adjustment,
principal and interest are payable monthly over sixty months, and the
note is secured by certain equipment located in the company's
Germantown, Maryland facilities. On June 19, 1997, the company issued
a $10,000,000 note to a financial institution. The note bears
interest at 8.64%, principal and interest are payable monthly over
sixty months, and the note is secured by certain office, computer and
test equipment related to the company's launch vehicle operations in
Chandler, Arizona, and Dulles, Virginia.
Additionally, on June 27, 1997, the company terminated its L-1011
aircraft lease, and purchased the L-1011 aircraft for approximately
$9,860,000 from General Electric Capital Corporation ("GECC"). The
company financed the purchase with a note to GECC for approximately
$9,860,000, which is secured by the aircraft. The note bears interest
at 8.4% and principal and interest are payable monthly over 94 months.
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(5) Reclassifications
Certain reclassifications have been made to the 1996 condensed
consolidated financial statements to conform to the 1997 condensed
consolidated financial statement presentation.
(6) Investments in Affiliates
On May 8, 1997, the company's subsidiary, Orbital Imaging Corporation
("ORBIMAGE"), completed a private placement of 300,100 shares of
Series A Cumulative Convertible Preferred Stock (the "Preferred
Stock"), raising gross proceeds of $30,010,000. On that date, Orbital
also purchased ORBIMAGE common stock, bringing its total equity
invested to approximately $89,187,000. On July 3, 1997, ORBIMAGE
placed an additional 72,605 shares of Preferred Stock, raising an
additional $7,260,500. Each share of Preferred Stock entitles its
holder to receive annual cumulative dividends of 12% per annum. The
Preferred Stock is convertible into ORBIMAGE common stock in an amount
equal to $100 per share of Preferred Stock, divided by the Conversion
Price of $4.17 per share of Preferred Stock. The Conversion Price
is subject to adjustment under certain circumstances. Pursuant to the
terms of the Preferred Stock and the related stockholders' agreement,
ORBIMAGE's board is made up of two Orbital nominated directors, two
directors nominated by the Preferred Stockholders, and one independent
director. Most significant actions require the approval of at least
one Orbital nominee and one Preferred Stockholder nominee, with the
result that Orbital no longer controls ORBIMAGE's financial and
operational affairs and, accordingly, will no longer consolidate
ORBIMAGE's financial results. Orbital will use the equity method of
accounting for its investment in, and earnings or losses of ORBIMAGE.
Pursuant to a firm-fixed price contract with ORBIMAGE, Orbital is the
primary supplier to ORBIMAGE of imaging satellites, launch services
and ground systems. ORBIMAGE's second satellite, OrbView-2, was
successfully launched on August 1, 1997. During the quarter ended
June 30, 1997, Orbital recorded approximately $33,340,000 of sales to
ORBIMAGE pursuant to this contract. Additionally, Orbital provides
certain administrative support to ORBIMAGE on a cost-reimbursable
basis, including office space, utilities, administrative supplies,
management and accounting services, and certain other administrative
services on a cost-reimbursable basis. During the quarter ended June
30, 1997, Orbital recorded contract revenues of approximately
$2,090,000 pursuant to the administrative services agreement.
Because ORBIMAGE is capitalizing substantially all of its purchases
from Orbital, during the quarter ended June 30, 1997, Orbital
eliminated $3,097,000 as equity in earnings (losses) of affiliates,
representing 75% of profits on sales to ORBIMAGE.
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(7) New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share." SFAS No. 128 provides new
procedures for the computation, presentation and disclosure of primary
EPS and fully-diluted EPS, simplifying the calculations and making
them more comparable with international accounting standards.
Pursuant to SFAS No. 128, the company will adopt the new requirements
in the fourth quarter of 1997, restating all prior periods. The
company expects that the adoption of SFAS No. 128 will not materially
impact 1997, or previously reported, primary EPS or fully-diluted EPS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in the financial
statements. The Company will adopt the provisions of SFAS No. 130
in 1998. The disclosure of comprehensive income in accordance with
the provisions of SFAS No. 130 will impact the manner of presentation
of the company's financial statements as currently and previously
reported. Upon adoption, the company will be required to reclassify
previously reported annual and interim financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
establishes new procedures for the determination of a business
segment and for the presentation and disclosure of segment
information. SFAS No. 131 requires that companies disclose segment
data based on how management makes decisions about allocating
resources to segments and measuring their performance. SFAS No. 131
also requires the disclosure of selected segment information in interim
financial statements. The company will adopt the provisions of SFAS
No. 131 in 1998. The company is currently assessing the requirements
of SFAS No. 131 and can not currently predict the impact of the
statement on segment disclosures.
(8) Subsequent Events
CTA INCORPORATED ACQUISITION. On July 11, 1997, Orbital entered into
an agreement to acquire substantially all the assets, including all
the stock of certain subsidiaries, and certain liabilities relating to
the satellite manufacturing and communications services businesses of
CTA INCORPORATED ("CTA"). As consideration, Orbital will (a) pay
$12,000,000 in cash and (b) refinance $27,000,000 of outstanding debt
related to the acquired business. Total consideration is subject to
adjustment based on the difference between net tangible assets as of
May 1997 and as of the closing date. The payment at closing is
subject to a $3,000,000 holdback by Orbital pending calculation of the
net tangible assets. During the five years following the closing, CTA
will also be entitled to receive (a) royalties from $500,000 to
$3,000,000 per STARbus satellite sale after at least five satellites
have been sold (the STARbus satellite is a geosynchronous orbit
communications satellite developed by CTA), and (b) 3% of cumulative
revenues in excess of $50,000,000 accrued during such period from the
acquired GEMtrak transportation management business. The acquisition
is subject to government regulatory approval and other customary
closing conditions. The transaction is expected to close by
mid-August 1997. The company will account for the acquisition using
the purchase method of accounting.
ROCKWELL INTERNATIONAL CORPORATION ACQUISITION. On July 31, 1997,
Orbital acquired from Rockwell International Corporation ("Rockwell")
the assets and certain liabilities associated with Rockwell's
PathMaster automotive navigation product line. Orbital paid
approximately $3,550,000 in cash and provided to Rockwell a $4,350,000
note, which bears interest at 6% and is repayable semi-annually over
three years. The company will account for the acquisition using the
purchase method of accounting.
DEBT. On August 6, 1997, Orbital amended and restated its existing
revolving credit facility (the "facility") to provide for total
borrowings from an international syndicate of six banks of up to
$100,000,000. The new facility includes the company's subsidiary,
Magellan Corporation ("Magellan"), as a borrower. The facility
includes a $35,000,000 term loan, which matures July 2001, and a
$65,000,000 revolving line of credit, borrowings under which are
subject to a defined borrowing base composed of certain receivables
of Orbital and its Magellan subsidiary. The principal amount of the
term loan is payable in quarterly installments beginning December 31,
1997. In addition, the company is required to reduce borrowings
outstanding under the term loan to $25,000,000 to the extent the
company receives certain net cash proceeds from the issuance of
additional debt or equity or asset sales. The interest rate charged
under the facility is a variable rate based on the prime rate or
LIBOR. The interest rate on the initial August 1997 borrowing under
the facility was approximately 7.2%. The facility restricts the
payment of cash dividends and contains certain covenants with respect
to the company's working capital levels, fixed charge ratio,
leverage ratio and tangible net worth, and expires in August 2001.
The facility amends and restates the company's previous $65,000,000
revolving credit facility under which no borrowings were outstanding
at June 30, 1997. In addition, the facility replaces (i) Magellan's
$10,000,000 line of credit under which $7,490,000 was outstanding at
June 30, 1997, and (ii) a $25,000,000 six-
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month short-term bridge loan that the company obtained on May 7, 1997,
under which $25,000,000 was outstanding at June 30, 1997. In August
1997, the company repaid these outstanding balances with proceeds from
the new facility.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 1997
AND 1996
In addition to the historical information contained herein, Management's
Discussion and Analysis of Financial Condition and Results of Operations also
includes forward-looking statements that involve risks and uncertainties, many
of which may be beyond the company's control. These may include, but are not
limited to, general and economic business conditions, launch success, satellite
and communications product performance, availability of required capital,
market acceptance of new products and technologies, performance of the
company's affiliates ORBCOMM Global, L.P. ("ORBCOMM") and Orbital Imaging
Corporation ("ORBIMAGE"), and U.S. government policies, priorities and funding
of programs related to the company's launch, satellite, and electronics and
sensor systems lines of business. The actual results that Orbital achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties.
RECENT DEVELOPMENTS. On July 11, 1997, Orbital entered into an agreement to
acquire substantially all the assets, including all the stock of certain
subsidiaries, and certain liabilities relating to the satellite manufacturing
and communications services businesses of CTA INCORPORATED ("CTA").
Additionally, on July 31, 1997, Orbital acquired from Rockwell International
Corporation ("Rockwell") the assets and certain liabilities, associated with
Rockwell's PathMaster automotive navigation product line.
The company's products and services are grouped into three business sectors:
Space and Ground Infrastructure Systems, Satellite Access Products, and
Satellite-Delivered Services. Space and Ground Infrastructure Systems include
Launch Systems, Satellites, Electronics and Sensor Systems, and Ground Systems.
The company's Satellite Access Products sector consists of satellite-based
navigation and communications products and transportation management systems.
The company's Satellite-Delivered Services sector includes satellite-based,
two-way mobile data communications services and satellite-based imagery
services.
REVENUES. Orbital's revenues for the three-month periods ended June 30, 1997
and 1996 were $142,226,000 and $116,512,000, respectively. Revenues for the
six-month periods ended June 30, 1997 and 1996 were $264,338,000 and
$221,406,000, respectively. The increase in revenue during these periods is
generally reflective of the significant amount of new orders received since
1995.
Revenues for the 1997 second quarter include sales to ORBCOMM, a Delaware
limited partnership in which Orbital holds a 50% non-controlling interest, of
$15,621,000, as compared to $15,762,000 for the 1996 second quarter. Sales to
ORBCOMM for the six-month periods ended June 30, 1997 and 1996 were $27,224,000
and $29,470,000, respectively. Revenues for
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the 1997 second quarter include sales of approximately $35,429,000 to Orbital
Imaging Corporation ("ORBIMAGE"), a Delaware corporation in which Orbital holds
a 75% non-controlling interest. No such sales to ORBIMAGE were included in
earlier periods.
Space and Ground Infrastructure Systems
Revenues from the company's Space and Ground Infrastructure Systems totaled
$122,523,000 and $97,500,000 for the three months ended June 30, 1997 and 1996,
respectively, and $228,722,000 and $179,161,000 for the six months ended June
30, 1997 and 1996, respectively.
Revenues from the company's launch systems of $27,223,000 in the second quarter
of 1997 were consistent with the $27,554,000 in the second quarter of 1996.
Launch system revenues were $57,117,000 for the six months ended June 30, 1997
as compared to $46,817,000 for the comparable 1996 period. The significant
increase in year-to-year revenues is attributable to increased revenues from
the company's Taurus launch vehicle program, and from the resumption of
production and launch of the company's Pegasus launch vehicle in 1997.
Additionally, the company was just beginning to perform work under the X-34
reusable launch vehicle program in the first quarter of 1996, and did not
generate significant revenues until the second quarter of 1996. Accordingly,
the year-to-date 1997 X-34 revenues are significantly higher than the
comparable 1996 period, but on a quarter-to-quarter comparison, X-34 revenues
are generally consistent. On August 1, 1997, Orbital carried out a successful
Pegasus launch, delivering an ORBIMAGE satellite into orbit. So far in 1997,
Orbital has carried out seven successful space missions, including five
suborbital missions and two Pegasus launches. Orbital expects total 1997
launch systems revenues to exceed total 1996 launch systems revenues.
For the three months ended June 30, 1997, satellite revenues increased to
$56,481,000 from $27,982,000 in the second quarter of 1996. Satellite revenues
were $87,284,000 for the six months ended June 30, 1997 as compared to
$50,541,000 for the comparable 1996 period. The significant increase in
satellite sales is primarily due to additional revenues generated from new
satellite orders received in the second half of 1996 and from revenues
generated by sales to ORBIMAGE. The company expects revenues from satellites
to continue to exceed 1996 revenues on a quarterly basis throughout the
remainder of 1997, primarily due to work performed on new orders and the
acquisition of the satellite business unit from CTA.
Revenues from electronics and sensor systems were $22,172,000 for the three
months ended June 30, 1997 as compared to $21,370,000 in the 1996 comparable
period. Electronics and sensor systems revenues for the six months ended June
30, 1997 and 1996 were $50,193,000 and $37,849,000, respectively. The increase
in revenues is primarily a result of work performed on defense electronics and
sensor systems orders received during the second half of 1996 and first quarter
of 1997. Orbital expects sales of electronics and sensor systems to continue
to exceed 1996 levels, throughout the remainder of 1997 due to the new orders
received during the second half of 1996 and in 1997.
Revenues from the company's ground systems products were $16,692,000 in the
second quarter of 1997 as compared to $20,593,000 in the 1996 quarter. Ground
systems product revenues were $34,128,000 for the six months ended June 30,
1997 as compared to $43,899,000 for the
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comparable 1996 period. Revenues for the three- and six-month periods ended
June 30, 1996 included approximately $4,664,000 and $9,138,000, respectively,
of sales generated by the company's former subsidiary, The PSC Communications
Group Inc. ("PSC"); the company sold substantially all the assets of PSC during
the fourth quarter of 1996. Excluding the decrease attributable to the PSC
sale, ground systems revenues increased slightly on a quarter-to-quarter basis,
and are consistent on a year-to-year basis. The company expects 1997 annual
ground systems products revenue to slightly exceed 1996 annual revenues,
excluding the revenues attributable to PSC, due to significant new orders
received during the fourth quarter of 1996 and in early 1997.
Satellite Access Products
Revenues from sales of navigation and communications products and
transportation management systems increased to $19,899,000 for the 1997 second
quarter as compared to $18,688,000 for the comparable 1996 period. Satellite
access product revenues were $35,535,000 for the six-months ended June 30, 1997
as compared to $41,456,000 for the comparable 1996 period. The significant
decrease in year to year revenues is primarily attributable to increased
competition in certain markets for consumer global positioning system ("GPS")
products. The company believes that it will continue to experience similar
market conditions over the next few quarters. However, the company
anticipates the introduction of several new navigation and communication
products during the remainder of 1997, which it expects may improve its
competitive position. In addition, in August 1997 the company added the
PathMaster GPS automotive navigation system product line. Should such
products achieve anticipated market acceptance, the company expects that
satellite access products revenues will increase on a quarterly basis for the
remainder of 1997 as compared to comparable 1996 periods.
Satellite-Delivered Services
The company's ORBCOMM start-up business generated virtually no U.S. service
revenues in 1997 or 1996 and is not expected to generate significant revenues
until 1998. As a result of the ORBIMAGE private placement transaction, Orbital
no longer consolidates ORBIMAGE's service revenues.
GROSS PROFIT. Gross profit depends on a number of factors, including the
company's mix of contract types and costs incurred thereon in relation to
estimated costs. The company's gross profit for the second quarter of 1997 was
$39,673,000 as compared to $32,888,000 in the 1996 second quarter. Gross
profit margin as a percentage of sales for those periods was approximately
27.9% and 28.2%, respectively. The company's gross profit for the first half
of 1997 was $73,351,000 as compared to $65,200,000 for the first half of 1996.
Gross profit margin as a percentage of sales for those periods was
approximately 27.7% and 29.4%, respectively. The decreased gross profit margin
as a percentage of sales in 1997 is primarily attributable to (i) completing
work on certain lower margin launch vehicle contracts in 1997, (ii) increased
revenues generated from lower margin transportation management systems and
(iii) lower margins realized on navigation and communications products as a
result of increased competition. These gross profit margin decreases were
partially offset by favorable margin trends achieved on certain satellite
contracts. The company expects that its gross profit margin for the remainder
of 1997 will be generally consistent with the margin achieved during the first
half of 1997.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses represent
Orbital's self-funded product development activities, and exclude direct
customer-funded development. Research and development expenses during the
three-month periods ended June 30, 1997 and 1996 were $4,682,000 and
$4,953,000, respectively. Research and development expenses during the
six-month periods ended June 30, 1997 and 1996 were $11,694,000 and
$11,331,000, respectively. Research and development expenses in 1997 and 1996
relate primarily to the development of new or improved navigation and
communications products, improved launch vehicles and new satellite
initiatives. The company expects total 1997 expenditures to be slightly lower
than 1996 expenditures both as a percentage of revenues and in absolute
dollars.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the costs of marketing, advertising,
promotional and other selling expenses as well as the costs of the finance,
administrative and general management functions of the company. Selling,
general and administrative expenses for the second quarters of 1997 and 1996
were $23,244,000 (or 16.3% of revenues) and $19,829,000 (or 17.0% of revenues),
respectively. Selling, general and administrative expenses for the first half
of 1997 and 1996 were $43,122,000 (or 16.3% of revenues) and $39,094,000 (or
17.6% or revenues), respectively. The decrease in selling, general and
administrative expenses as a percentage of revenues in 1997 is generally
reflective of the substantial amount of new orders received during the latter
half of 1996 and in 1997. During 1997, Orbital has been largely successful in
generating increased revenues from such new orders without corresponding
increases to general and administrative costs. Product lines that achieved
substantial revenue growth include satellites, launch vehicles and defense
electronics. The company expects selling, general and administrative expenses
as a percentage of revenues during the remainder of 1997 to be slightly higher
than the percentage attained during the first half of 1997, but still lower
than 1996 levels.
INTEREST INCOME AND INTEREST EXPENSE. Net interest income was $50,000 for the
three months ended June 30, 1997 as compared to net interest expense of
$814,000 in the 1996 second quarter. Net interest income during the six-months
ended June 30, 1997 was $310,000 as compared to net interest expense of
$1,449,000 during the 1996 comparable period. Interest income for the periods
reflects interest earnings on short-term investments. Interest expense in 1997
is primarily for outstanding amounts on Orbital's revolving credit facilities
and on other secured and unsecured debt. In 1996, interest expense included
interest on the company's convertible debentures, which were converted to
common stock in August 1996. Interest expense has been reduced by capitalized
interest of $2,971,000 and $3,351,000 in 1997 and 1996, respectively. Due to
increases in borrowings during the second quarter and further borrowings
expected in the third quarter to fund recently announced business acquisitions,
the company expects interest expense for the remainder of 1997 to be
significantly higher than interest expense in the first half of 1997, but
expects total 1997 net interest expense to be slightly less than that in 1996.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES AND NON-CONTROLLING INTERESTS IN
CONSOLIDATED SUBSIDIARIES. Equity in losses of affiliates and non-controlling
interests in losses of consolidated subsidiaries for the second quarter of 1997
and 1996 were $4,830,000 and $2,245,000, respectively, and $5,477,000 and
$4,006,000 for the six month periods ended June 30, 1997 and
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1996, respectively. These amounts primarily represent (i) elimination of 50%
and 75% of the profits on sales of infrastructure products to ORBCOMM and
ORBIMAGE, respectively, (ii) the company's pro rata share of ORBCOMM's, ORBCOMM
International Partners L.P.'s ("ORBCOMM International"), and ORBIMAGE's current
period earnings and losses, and (iii) non-controlling shareholders' pro rata
share of ORBCOMM USA L.P.'s ("ORBCOMM USA") current period earnings and losses.
The company expects ORBCOMM's, ORBCOMM International's, ORBCOMM USA's and
ORBIMAGE's start-up losses to continue to increase during the remainder of 1997
and into 1998. As a result, the company expects its share of the ORBCOMM
partnerships' losses to increase from 1996 amounts, and expects its share of
ORBIMAGE's losses to increase from second quarter 1997 amounts.
PROVISION FOR INCOME TAXES. The company recorded an income tax provision of
$622,000 and $426,000 for the three-month periods ended June 30, 1997 and 1996,
respectively. For the six-month periods ended June 30, 1997 and 1996, the
company recorded an income tax provision of $1,188,000 and $774,000,
respectively. The company records its interim income tax provisions based on
estimates of the company's effective tax rate expected to be applicable for the
full fiscal year. Estimated effective rates recorded during interim periods
may be periodically revised, if necessary, to reflect current estimates.
At December 31, 1996, Orbital had approximately $120,000,000 and $3,000,000 of
net operating loss and tax credit carryforwards, respectively, which are
available to reduce future income tax obligations, subject to certain annual
limitations and other restrictions.
LIQUIDITY AND CAPITAL RESOURCES
The company's growth has required substantial capital to fund both an expanding
business base and significant research and development and capital
expenditures. The company has funded these requirements to date, and expects
to fund its requirements in the future, through cash generated by operations,
working capital, loan facilities, asset-based financings, joint venture
arrangements, and private and public equity and debt offerings. Additionally,
the company has historically made strategic acquisitions of businesses and
routinely evaluates potential acquisition candidates. The company expects to
continue to pursue potential acquisitions that it believes would enhance its
businesses. The company has historically financed its acquisitions, and
expects to finance its future acquisitions, through cash on hand, cash
generated by operations, the issuance of debt and/or equity securities, and/or
asset-based financings.
At June 30, 1997, cash, cash equivalents and short-term investments were
$34,235,000, and the company had short-term and long-term debt obligations
outstanding of approximately $118,536,000. The outstanding debt relates
primarily to advances under the company's line of credit facilities, secured
and unsecured notes, and fixed asset financings.
On August 6, 1997, Orbital amended and restated its existing revolving credit
facility (the "facility") to provide for total borrowings from an international
syndicate of six banks of up to $100,000,000. This facility includes the
company's subsidiary, Magellan Corporation ("Magellan"), as a
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borrower. The facility contains a $35,000,000 term loan, which matures July
2001, and a $65,000,000 revolving line of credit, borrowings under which are
subject to a defined borrowing base composed of certain receivables of Orbital
and its Magellan subsidiary. The principal amount of the term loan is payable
in quarterly installments beginning December 31, 1997. In addition, the
company is required to reduce borrowings outstanding under the term loan to
$25,000,000 to the extent the company receives certain net cash proceeds from
the issuance of additional debt or equity or asset sales. The interest rate
charged under the facility is a variable rate based on the prime rate or LIBOR.
The interest rate on the initial August 1997 borrowing under the facility was
approximately 7.2%. The facility restricts the payment of cash dividends and
contains certain covenants with respect to the company's working capital
levels, fixed charge ratio, leverage ratio, and tangible net worth, and expires
in August 2001.
The facility amends and restates the company's previous $65,000,000 revolving
credit facility under which no borrowings were outstanding at June 30, 1997.
In addition, the facility replaces (i) Magellan's $10,000,000 line of credit
under which $7,490,000 was outstanding at June 30, 1997, and (ii) a $25,000,000
six-month short-term bridge loan that the company obtained on May 7, 1997,
under which $25,000,000 was outstanding at June 30, 1997. In August 1997, the
company repaid these outstanding balances with proceeds from the new facility.
On June 13, 1997, the company issued a $13,210,000 note to a financial
institution. The note bears interest at 7.19%, subject to adjustment,
principal and interest are payable monthly over sixty months, and the note is
secured by certain equipment located in the company's Germantown, Maryland
facilities. On June 19, 1997, the company issued an additional $10,000,000
note to a financial institution. The note bears interest at 8.64%, principal
and interest are payable monthly over sixty months, and the note is secured by
certain office, computer and test equipment related to the company's launch
vehicle operations in Chandler, Arizona, and Dulles, Virginia.
Additionally, on June 27, 1997, the company terminated its L-1011 aircraft
lease, and purchased the L-1011 aircraft for approximately $9,860,000 from
General Electric Capital Corporation ("GECC"). The company financed the
purchase with a note to GECC for approximately $9,860,000, which is secured by
the aircraft. The note bears interest at 8.4% and principal and interest are
payable monthly over 94 months.
The company's operations provided net cash of approximately $41,000,000 in the
first half of 1997. The company expects quarterly cash provided by operations
during the remainder of 1997 to be significantly less than the amount achieved
during the first half of 1997. The company invested approximately $2,900,000
in ORBCOMM (consisting solely of capitalized interest costs), and incurred
approximately $18,656,000 in capital expenditures for office equipment,
capitalized software and various spacecraft, launch vehicle and other
production and test equipment in the first half of 1997. In addition, as a
result of the transactions involving ORBIMAGE, the company increased its
investment in ORBIMAGE to approximately $89,187,000 during the second quarter.
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On May 8, 1997, the company's subsidiary, ORBIMAGE, completed a private
placement of 300,100 shares of Series A Cumulative Convertible Preferred Stock
(the "Preferred Stock"), raising gross proceeds of $30,010,000. On that date,
Orbital also purchased ORBIMAGE common stock, bringing its total equity
invested to approximately $89,187,000. On July 3, 1997, ORBIMAGE placed an
additional 72,605 shares of Preferred Stock, raising an additional $7,260,500.
ORBIMAGE currently expects that it will require additional financing to fully
fund its current business plan. To the extent some or all of the additional
funding can not be raised from third-party investors on specified terms,
Orbital has agreed to purchase up to approximately $42,000,000 in preferred
stock (up to $22,000,000 by December 31, 1997 and up to an additional
$20,000,000 by June 30, 1998) on terms defined in the private placement.
Based on its current assessment of the overall business prospects of ORBIMAGE,
the company believes its investment in ORBIMAGE at June 30, 1997 of $89,187,000
is fully recoverable. If, in the future, the ORBIMAGE business is not
successful, the company may be required to expense part or all of its
investment.
On July 11, 1997, Orbital entered into an agreement to acquire substantially
all the assets, including all the stock of certain subsidiaries, and certain
liabilities relating to the satellite manufacturing and communications services
businesses of CTA. As consideration, Orbital will (a) pay $12,000,000 in cash
and (b) refinance $27,000,000 of outstanding debt related to the acquired
business. Total consideration is subject to adjustment based on the difference
between net tangible assets as of May 1997 and as of the closing date. The
payment at closing is subject to a $3,000,000 holdback by Orbital pending
calculation of the net tangible assets. The transaction is expected to close
by mid-August 1997, and the company expects to fund the acquisition utilizing
its existing line of credit. The company will account for the acquisition
using the purchase method of accounting.
On July 31, 1997, Orbital acquired from Rockwell the assets and certain
liabilities associated with Rockwell's PathMaster automotive navigation product
line. Orbital paid approximately $3,550,000 in cash and provided to Rockwell a
$4,350,000 note, which bears interest at 6% and is repayable semi-annually over
three-years. The company will account for the acquisition using the purchase
method of accounting.
Orbital expects that its capital needs for the remainder of 1997, including the
payment and refinancing related to the CTA acquisition, will in part be
provided by working capital, cash flows from operations, existing credit
facilities, customer financings and operating lease arrangements. The company
may also consider new debt and equity financings to realign its capital
structure and to fund potential capital requirements in 1998 and 1999.
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ORBITAL SCIENCES CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
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
(a) The annual meeting of stockholders of the
Company was held on April 24, 1997.
(b) Not applicable.
(c)(i) Election of four directors, each serving for a
three-year term:
Douglas S. Luke
---------------
Votes: For: 26,782,864 Against: 0
Withheld: 198,421 Abstain: 0
Broker Non-Votes: 0
John L. McLucas
---------------
Votes: For: 26,779,339 Against: 0
Withheld: 201,946 Abstain: 0
Broker Non-Votes: 0
Harrison H. Schmitt
-------------------
Votes: For: 26,783,987 Against: 0
Withheld: 197,298 Abstain: 0
Broker Non-Votes: 0
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Scott L. Webster
----------------
Votes: For: 26,492,439 Against: 0
Withheld: 488,846 Abstain: 0
Broker Non-Votes: 0
(i) Proposal to approve the adoption of an amendment to Section 5 of the Company's Restated
Certificate of Incorporation increasing the number of authorized shares of Common Stock from
40,000,000 o 80,000,000.
Votes: For: 25,430,097 Against: 1,459,408
Withheld: 0 Abstain: 91,780
Broker Non-Votes: 0
(i) Proposal to approve the adoption of the Orbital Sciences Corporation 1997 Stock Option and
Incentive Plan.
Votes: For: 20,797,605 Against: 6,042,032
Withheld: 0 Abstain: 141,648
Broker Non-Votes: 0
(i) Proposal to ratify the selection of KPMG Peat Marwick LLP as the Company's independent
accountants for the fiscal year ending December, 1997.
Votes: For: 26,793,067 Against: 123,797
Withheld: 0 Abstain: 64,421
Broker Non-Vote: 0
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 that precedes the exhibits filed with this
report.
(b) Not applicable.
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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: August 13, 1997 By: /s/ David W. Thompson
----------------------------------------
David W. Thompson, President
and Chief Executive Officer
DATED: August 13, 1997 By: /s/ Jeffrey V. Pirone
----------------------------------------
Jeffrey V. Pirone, Senior Vice President
and Principal Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit No. Description
----------- -----------
11 Statement re: Computation of Earnings Per Share
(transmitted herewith).
27 Financial Data Schedule (such schedule is furnished
for the information of the Securities and Exchange
Commission and is not to be deemed "filed" as part of
the Form 10Q, or otherwise subject to the liabilities
of Section 18 of the Securities Act of 1934)
transmitted herewith).
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