1
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
SEPTEMBER 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 (Telephone number)
offices)
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 October 31, 1997, 32,334,230 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
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 19,123 $ 26,859
Short-term investments, at market 19,888 5,827
Receivables, net 162,655 144,774
Inventories, net 44,089 27,159
Deferred income taxes and other assets 7,825 6,475
--------- ---------
TOTAL CURRENT ASSETS 253,580 211,094
PROPERTY, PLANT AND EQUIPMENT, AT COST, LESS ACCUMULATED
depreciation and amortization of $76,394 and $69,534, respectively 127,256 127,862
INVESTMENTS IN AFFILIATES, NET 181,843 86,524
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED,
less accumulated amortization of $18,655 and $15,972, respectively 107,237 69,512
DEFERRED INCOME TAXES AND OTHER ASSETS 23,259 9,720
--------- ---------
TOTAL ASSETS $ 693,175 $ 504,712
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of
long-term obligations $ 26,464 $ 38,519
Accounts payable 38,369 25,789
Accrued expenses 59,185 32,372
Deferred revenue 36,560 30,741
--------- ---------
TOTAL CURRENT LIABILITIES 160,578 127,421
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION 179,816 33,076
OTHER LIABILITIES 7,599 15,523
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TOTAL LIABILITIES 347,993 176,020
NON-CONTROLLING INTERESTS IN
NET ASSETS OF CONSOLIDATED SUBSIDIARIES (3,452) (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 325,394 323,592
Unrealized gains on short-term investments 44 14
Cumulative translation adjustment (4,209) (3,681)
Retained earnings 27,082 10,255
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 348,634 330,502
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 693,175 $ 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
SEPTEMBER 30,
-----------------------------
1997 1996
------------ ------------
REVENUES $ 164,670 $ 119,571
COSTS OF GOODS SOLD 118,655 87,696
------------ ------------
GROSS PROFIT 46,015 31,875
RESEARCH AND DEVELOPMENT EXPENSES 6,476 3,918
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 26,334 20,039
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 956 794
------------ ------------
INCOME FROM OPERATIONS 12,249 7,124
NET INVESTMENT INCOME (EXPENSE) 1,007 (26)
EQUITY IN LOSSES OF AFFILIATES (6,929) (2,543)
NON-CONTROLLING INTERESTS IN LOSSES
OF CONSOLIDATED SUBSIDIARIES 533 396
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,860 4,951
PROVISION FOR INCOME TAXES 730 495
------------ ------------
NET INCOME $ 6,130 $ 4,456
============ ============
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.18 $ 0.15
SHARES USED IN COMPUTING NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE 33,347,734 29,803,856
============ ============
NET INCOME PER COMMON SHARE, ASSUMING FULL DILUTION $ 0.18 $ 0.15
SHARES USED IN COMPUTING NET INCOME
PER COMMON SHARE, ASSUMING FULL DILUTION 34,492,637 31,663,151
============ ============
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 NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
------------ ------------
REVENUES $ 429,008 $ 340,977
COSTS OF GOODS SOLD 309,642 243,902
------------ ------------
GROSS PROFIT 119,366 97,075
RESEARCH AND DEVELOPMENT EXPENSES 18,170 15,249
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 69,456 59,133
AMORTIZATION OF EXCESS OF PURCHASE PRICE OVER
NET ASSETS ACQUIRED 2,439 2,373
------------ ------------
INCOME FROM OPERATIONS 29,301 20,320
NET INVESTMENT INCOME (EXPENSE) 1,317 (1,475)
EQUITY IN LOSSES OF AFFILIATES (13,590) (7,147)
NON-CONTROLLING INTERESTS IN LOSSES
OF CONSOLIDATED SUBSIDIARIES 1,717 994
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 18,745 12,692
PROVISION FOR INCOME TAXES 1,918 1,269
------------ ------------
NET INCOME $ 16,827 $ 11,423
============ ============
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ 0.51 $ 0.41
SHARES USED IN COMPUTING NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE 32,941,540 28,176,215
============ ============
NET INCOME PER COMMON SHARE, ASSUMING FULL DILUTION $ 0.50 $ 0.41
SHARES USED IN COMPUTING NET INCOME
PER COMMON SHARE, ASSUMING FULL DILUTION 33,960,724 31,575,334
============ ============
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 NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 16,827 $ 11,423
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization expense 18,435 17,828
Equity in losses of affiliates 13,590 7,147
Non-controlling interests in losses of consolidated subsidiaries (1,717) (994)
Gain on sale of fixed assets and investments -- (17)
Foreign currency translation adjustment (528) (716)
CHANGES IN ASSETS AND LIABILITIES:
Increase in current assets and other non-current assets (2,656) (11,958)
Decrease in current and other liabilities (15,715) (21,732)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 28,236 981
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31,757) (31,548)
Proceeds from sales of fixed assets 34,699 --
Payments for business combinations (44,116) --
Purchases of available-for-sale investment securities (25,379) (9,163)
Sales of available-for-sale investment securities 4,720 9,576
Maturities of available-for-sale investment securities 6,631 8,920
Investments in affiliates (104,394) (19,662)
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NET CASH USED IN INVESTING ACTIVITIES (159,596) (41,877)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of (repayments) (14,712) 38,200
Principal payments on long-term obligations (22,690) (6,206)
Net proceeds from issuance of long-term obligations 159,223 (2,571)
Net proceeds from issuances of common stock to employees 1,803 1,406
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 123,624 30,829
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,736) (10,067)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 26,859 15,317
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,123 $ 5,250
========= =========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine-month periods ended
September 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
consists 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
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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 average number of common and common
equivalent shares outstanding during the periods plus the effects of an
assumed conversion of the company's 5% convertible subordinated notes due
October 2002, to the extent dilutive. (See Note 7). Any reduction of less
than three percent in the aggregate has not been considered dilutive in
the calculation and presentation of fully-diluted EPS. 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. (See Note 8).
(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) Reclassifications
Certain reclassifications have been made to the 1996 condensed
consolidated financial statements to conform to the 1997 condensed
consolidated financial statement presentation.
(5) 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. Also on that date, Orbital 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
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share of Preferred Stock. After this transaction, Orbital no longer
controls ORBIMAGE's financial and operational affairs and, accordingly, no
longer consolidates ORBIMAGE's financial results. Orbital uses 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. Additionally, Orbital provides certain administrative
support to ORBIMAGE on a cost-reimbursable basis. During the three- and
nine-months ended September 30, 1997, Orbital recorded sales of
approximately $35,915,000 and $71,345,000, respectively, pursuant to these
contracts. ORBIMAGE is capitalizing substantially all its purchases from
Orbital. During the nine months ended September 30, 1997, Orbital
eliminated 75% of its profits on sales to ORBIMAGE, or $2,347,000. Orbital
recorded no profits on sales to ORBIMAGE during the quarter ended
September 30, 1997.
(6) Business Combinations
CTA INCORPORATED ACQUISITION. On August 15, 1997, Orbital acquired
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"). The financial results of the acquired businesses have been
included in the company's consolidated results from August 15, 1997
through September 30, 1997. As consideration, Orbital (i) paid
approximately $13,000,000 in cash, including certain post-closing
adjustments, and (ii) retired $27,000,000 of outstanding debt related to
the acquired business. The company accounted for the acquisition using the
purchase method of accounting. The purchase price exceeded fair value of
the acquired net assets by approximately $40,533,000. This excess is being
amortized on a straight-line basis over 30 years. During the five years
following the closing, CTA will also be entitled to receive (i) royalties
from $500,000 to $3,000,000 for sales by the company of certain
geostationary satellites after five such satellites have been sold by the
company, and (ii) 3% of cumulative revenues in excess of $50,000,000
accrued during such period from the terrestrial wireless cargo management
system acquired from CTA.
The following supplemental financial information presents the consolidated
results of operations on a pro forma basis, as though the company had
acquired CTA on January 1, 1996 (in thousands, except share data):
Nine Months Nine Months
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9/30/96 9/30/97
------- -------
Revenue $ 405,618 $ 477,073
Net income 11,009 18,151
Earnings per share:
Primary .39 .55
Fully diluted .39 .53
ROCKWELL INTERNATIONAL CORPORATION ACQUISITION. On July 31, 1997, Orbital
acquired from Rockwell International Corporation ("Rockwell") the assets
and certain liabilities associated with Rockwell's automotive navigation
product line. Orbital paid approximately $3,550,000 in cash and issued
Rockwell a $4,350,000 note, which bears interest at 6% and is repayable
semi-annually over three years. The company accounted for the acquisition
using the purchase method of accounting. The purchase price exceeded the
fair value of the net assets acquired by approximately $2,262,000, and is
being amortized on a straight-line basis over 10 years.
The CTA and the Rockwell acquisitions may require further adjustments to
excess of purchase price over the fair value of the net assets acquired.
The purchase price was allocated to the acquired assets and liabilities
using preliminary estimates of fair values as of the date of acquisition.
The final allocation of purchase price will be determined during the
remainder of 1997 when additional information becomes known about certain
business assumptions used to estimate fair value.
(7) Debt
On September 16, 1997, Orbital sold $100 million of 5% convertible
subordinated notes due October 2002. The notes, which are non-callable for
three years, are convertible at the option of the holders, into Orbital
common stock at a conversion price of $28.00 per share, subject to
adjustment in certain events. The sale was made to initial purchasers in
the United States ("U.S.") in reliance on an exemption under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), and
resold by the initial purchasers in the U.S. to "qualified institutional
buyers" pursuant to Rule 144A under the Securities Act and outside the
U.S. to non-U.S. persons in reliance on Regulation S under the Securites
Act. The company used a portion of the proceeds from the sale
to pay down outstanding borrowings under its various lines of credit and
$10,000,000 on its term loan described below. The balance was invested in
short-term instruments.
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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 Magellan. The principal
amount of the term loan is payable in quarterly installments beginning
December 31, 1997. In September 1997, the company reduced borrowings
outstanding under the term loan from $35,000,000 to $25,000,000 with
proceeds from the convertible notes offering pursuant to the terms of the
facility. The interest rate charged under the facility is a variable
rate based on the prime rate or LIBOR at the company's election.
The weighted average interest rate on borrowings outstanding under this
facility at September 30, 1997 was 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.
Proceeds from the facility were used to repay and retire (i) Magellan's
$10,000,000 line of credit and (ii) a $25,000,000 six-month short-term
bridge loan that the company obtained on May 7, 1997.
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 at the company's Germantown,
Maryland facility. In addition, 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. The
company financed the purchase with a note 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.
(8) New Accounting Pronouncements
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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 establishes new procedures for the
computation, presentation and disclosure of 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 previously reported primary or fully-diluted EPS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Pursuant to SFAS No. 130, 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"). SFAS No. 131
establishes new procedures for the determination of business segments and
for the presentation and disclosure of segment information and requires
the disclosure of selected segment information in interim financial
statements beginning in 1998. The company is currently assessing the
impact of adopting SFAS No. 131. The company currently believes that it
will not be required to change the composition of its segments, but that
it will be required to report segment financial information more
frequently.
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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 NINE-MONTH PERIODS ENDED SEPTEMBER
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 known and unknown risks and
uncertainties and other factors that may cause the actual results, performance
or achievements of the company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These may include, but are not limited to,
general and economic business conditions, launch success, product performance,
availability of required capital, market acceptance of new products, services
and technologies, the introduction of products and services by competitors, and
performance of the company's affiliates, ORBCOMM Global, L.P. ("ORBCOMM") and
Orbital Imaging Corporation ("ORBIMAGE").
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 recreational and
vehicle navigation products, 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.
RECENT DEVELOPMENTS. On September 16, 1997, Orbital sold $100 million of 5%
convertible subordinated notes due October 2002. The notes, which are
non-callable for three years, are convertible, at the option of the holders,
into Orbital common stock at a conversion price of $28.00 per share, subject to
adjustment in certain events. The sale was made to initial purchasers in the
United States ("U.S.") in reliance on an exemption under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), and resold by the
initial purchasers in the U.S. to "qualified institutional buyers" pursuant to
Rule 144A under the Securities Act and outside the U.S. to non-U.S. persons in
reliance on Regulation S under the Securities Act.
On August 15, 1997, Orbital acquired 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. The
financial results of the acquired businesses have been included in the company's
consolidated results from August 15, 1997 through September 30, 1997. As
consideration, Orbital (i) paid approximately $13,000,000 in cash, including
certain post-closing adjustments, and (ii) retired $27,000,000 of outstanding
debt related to the acquired business. The company funded the acquisition
utilizing its existing line of credit and cash flows from operations.
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On July 31, 1997, Orbital acquired from Rockwell International Corporation
("Rockwell"), the assets and certain liabilities associated with Rockwell's
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.
REVENUES. Orbital's revenues for the three-month periods ended September 30,
1997 and 1996 were $164,670,000 and $119,571,000, respectively. Revenues for the
nine-month periods ended September 30, 1997 and 1996 were $429,008,000 and
$340,997,000, respectively. The increase in revenues during these periods is
generally reflective of the significant amount of new orders received since
1995, and to a lesser extent, to the revenues generated by the newly acquired
satellite manufacturing and communications services businesses of CTA.
Revenues for the 1997 third quarter include sales to ORBCOMM, a partnership in
which Orbital holds a 50% non-controlling interest, of $9,493,000 as compared to
$4,883,000 for the 1996 third quarter. Sales to ORBCOMM for the nine-month
periods ended September 30, 1997 and 1996 were $36,717,000 and $34,353,000,
respectively. Revenues for the three-month and nine-month periods ended
September 30, 1997 include sales of approximately $35,915,000 and $71,345,000,
respectively, to ORBIMAGE, a corporation in which Orbital holds a 75%
non-controlling interest. No such sales to ORBIMAGE were included in earlier
years. See Note 5 to the Financial Statements.
Space and Ground Infrastructure Systems
Revenues from the company's Space and Ground Infrastructure Systems totaled
$149,387,000 and $103,152,000 for the three months ended September 30, 1997 and
1996, respectively, and $378,109,000 and $282,312,000 for the nine months ended
September 30, 1997 and 1996, respectively.
Revenues from the company's launch systems of $29,905,000 in the third quarter
of 1997 were consistent with the $28,246,000 in the third quarter of 1996.
Launch systems revenues were $87,022,000 for the nine months ended September 30,
1997 as compared to $75,117,000 for the comparable 1996 period. The significant
increase in year-to-date 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 on a reusable launch vehicle in the
first quarter of 1996, and did not generate significant revenues until the
second quarter of 1996. Accordingly, year-to-date 1997 revenues attributable to
the reusable launch vehicle are significantly higher than the comparable 1996
period, but on a third quarter-to-third quarter comparison, revenues
attributable to the reusable launch vehicle were generally consistent. To date
in 1997, Orbital has carried out ten successful space missions, including six
suborbital missions and four Pegasus launches. Orbital expects total 1997 launch
systems revenues to exceed total 1996 launch systems revenues.
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For the three months ended September 30, 1997, satellite revenues increased to
$74,485,000 from $29,475,000 in the same quarter of 1996. Satellite revenues
were $161,769,000 for the nine months ended September 30, 1997 as compared to
$80,016,000 for the comparable 1996 period. The significant increase in
satellite sales in 1997 is primarily due to additional revenues generated from
new satellite orders received in the second half of 1996 and from 1997 sales to
ORBIMAGE. Additionally, current quarter revenues include approximately
$22,000,000 of sales attributable to the satellite business unit acquired from
CTA on August 15, 1997. The company expects revenues from satellites to continue
to exceed 1996 revenues on a quarterly and year-to-date basis throughout 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 $26,915,000 for the three
months ended September 30, 1997 as compared to $25,572,000 in the 1996
comparable period. Electronics and sensor systems revenues for the nine months
ended September 30, 1997 and 1996 were $77,108,000 and $63,421,000,
respectively. The increase in revenues is primarily a result of work performed
on defense electronics and sensor system orders received during the second half
of 1996 and first quarter of 1997. Orbital expects this revenue trend to
continue and, accordingly, expects that 1997 sales of electronics and sensor
systems will exceed 1996 levels.
Revenues from the company's ground systems products were $18,802,000 in the
third quarter of 1997 as compared to $15,410,000 for the comparable 1996
quarter. Ground systems product revenues were $52,210,000 for the nine months
ended September 30, 1997 as compared to $50,178,000 for the comparable 1996
period. Ground systems revenues increased slightly on a quarter-to-quarter
basis, and are consistent on a year-to-date basis. The company expects 1997
annual ground systems products revenues to slightly exceed 1996 annual revenues
due to significant new orders received during the fourth quarter of 1996 and in
early 1997. This business segment also generated revenues for the three- and
nine-month periods ended September 30, 1996 of approximately $4,449,000 and
$13,580,000, respectively, attributable to 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.
Satellite Access Products
Revenues from sales of satellite access products decreased slightly to
$15,261,000 for the 1997 third quarter as compared to $15,989,000 for the
comparable 1996 period. Satellite access product revenues were $50,796,000 for
the nine-months ended September 30, 1997 as compared to $57,445,000 for the
comparable 1996 period. The significant decrease in year-to-year revenues is
primarily attributable to increased competition and changing customer needs in
certain markets for recreational global positioning system ("GPS") navigation
products. Additionally, the entire GPS market has experienced a general
down-turn over the past several quarters, and the company believes that
it will continue to experience similar market conditions over the next few
quarters. The company anticipates the introduction of several new navigation and
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communication products during the remainder of 1997 and in 1998, which it
expects may improve its competitive position and may result in increased revenue
in 1998. In addition, as a result of the Rockwell acquisition in August 1997,
the company added automotive navigation systems to its product line, although
the company does not anticipate significant sales from this product line until
the second half of 1998.
Satellite-Delivered Services
The company's ORBCOMM start-up business generated minimal U.S. service revenues
in 1997 and 1996 and is not expected to generate significant revenues until
1998. As a result of the ORBIMAGE private placement transaction (see discussion
in Liquidity and Capital Resources section), 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 third quarter of 1997 was
$46,015,000 as compared to $31,875,000 in the 1996 third quarter. Gross profit
margin as a percentage of sales for those periods was approximately 27.9% and
26.7%, respectively. The company's gross profit for the first nine months of
1997 was $119,366,000 as compared to $97,075,000 for the first nine months of
1996. Gross profit margin as a percentage of sales for those periods decreased
slightly to approximately 27.8% from 28.5%, respectively. The decreased 1997
gross profit margin is primarily attributable to lower margins realized on
satellite access products due to factors related to increased competition and
changing customer needs. The lower margins realized in satellite access products
were offset, in part, by the release of certain contingency reserves that were
no longer needed. The company continues to realize favorable margin trends on
certain space infrastructure contracts. These favorable margins helped to
partially offset the company's year-to-date decrease in gross profit margin. The
company expects that its gross profit margin for the remainder of 1997 will
generally be consistent with the margin achieved during the first nine months of
1997.
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 September 30, 1997 and 1996 were $6,476,000 (or 3.9%
of revenues) and $3,918,000 (or 3.3% of revenues), respectively. Research and
development expenses during the nine-month periods ended September 30, 1997 and
1996 were $18,170,000 (or 4.2% of revenues) and $15,249,000 (or 4.5% of
revenues), 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 as a percentage of revenues, but higher in absolute dollars.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the costs of marketing, advertising, promotional
and other selling
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expenses as well as the costs of the finance, administrative and general
management functions of the company. Selling, general and administrative
expenses for the third quarters of 1997 and 1996 were $26,334,000 (or 16.0% of
revenues) and $20,039,000 (or 16.8% of revenues), respectively. Selling, general
and administrative expenses for the first nine months of 1997 and 1996 were
$69,456,000 (or 16.2% of revenues) and $59,133,000 (or 17.3% of revenues),
respectively. The decrease in selling, general and administrative expenses as a
percentage of revenues in 1997 is generally reflective of the increase in
revenues due to a 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. The company expects selling,
general and administrative expenses as a percentage of revenues during the
remainder of 1997 to be consistent with the percentage attained during the first
nine months of 1997, but still lower as a percentage of revenues than 1996
levels.
INVESTMENT INCOME AND INVESTMENT EXPENSE. Net investment income was $1,007,000
for the three months ended September 30, 1997 as compared to net investment
expense of $26,000 in the 1996 third quarter. Net investment income during the
nine-months ended September 30, 1997 was $1,317,000 as compared to net
investment expense of $1,475,000 during the 1996 comparable period. Investment
income 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 6-3/4% convertible debentures, which were
converted to common stock in August 1996. Interest expense has been reduced by
capitalized interest of $4,052,000 and $2,237,000, respectively, for the third
quarter of 1997 and 1996, and by $7,024,000 and $5,208,000, respectively, for
the first nine months of 1997 and 1996. Due to the issuance of the 5%
convertible notes this quarter and other increases in borrowings to fund recent
business and asset acquisitions, the company expects interest (expensed and
capitalized) for the remainder of 1997 to be significantly higher than interest
in the first half of 1997, but expects total 1997 net interest expense to be
slightly less than that in 1996.
EQUITY IN LOSSES OF AFFILIATES AND NON-CONTROLLING INTERESTS IN LOSSES OF
CONSOLIDATED SUBSIDIARIES. Equity in losses of affiliates and non-controlling
interests in losses of consolidated subsidiaries for the third quarter of 1997
and 1996 were $6,396,000 and $2,147,000, respectively, and $11,873,000 and
$6,153,000 for the nine month periods ended September 30, 1997 and 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, and (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, net of non-controlling shareholders' pro rata share
of ORBCOMM USA L.P.'s ("ORBCOMM USA") current period earnings and losses. The
company expects the start-up losses of ORBCOMM, ORBCOMM International, ORBCOMM
USA and ORBIMAGE to continue to increase during the remainder of 1997 and into
1998. As a result, the
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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
year-to-date amounts.
PROVISION FOR INCOME TAXES. The company recorded an income tax provision of
$730,000 and $495,000 for the three-month periods ended September 30, 1997 and
1996, respectively. For the nine-month periods ended September 30, 1997 and
1996, the company recorded an income tax provision of $1,918,000 and $1,269,000,
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 an expanding
business base, as well as 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 September 30, 1997, cash, cash equivalents and short-term investments were
$39,011,000, and the company had short-term and long-term debt obligations
outstanding of approximately $206,280,000. The outstanding debt consists
primarily of $100,000,000 of 5% convertible notes, issued during the current
quarter, and of secured and unsecured notes.
On September 16, 1997, Orbital completed the sale of $100 million of 5%
convertible subordinated notes due October 2002. The notes, which are
non-callable for three years, are convertible, at the option of the holders,
into Orbital common stock at a conversion price of $28.00 per share, subject to
adjustment in certain events. The company used a portion of the proceeds from
the sale to pay down outstanding borrowings under its various lines of credit
and $10,000,000 on a long-term loan. The balance was invested in short-term
instruments.
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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 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 Magellan. The principal amount of the term loan is payable in quarterly
installments beginning December 31, 1997. In September 1997, the company
reduced borrowings outstanding under the term loan from $35,000,000 to
$25,000,000 with proceeds from the convertible notes offering pursuant to the
terms of the facility. The interest rate charged under the facility is
a variable rate based on the prime rate or LIBOR at the company's election. The
weighted average interest rate on borrowings outstanding under this facility at
September 30, 1997 was 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. Proceeds from the facility were used to repay and
retire (i) Magellan's $10,000,000 line of credit and (ii) a $25,000,000
six-month short-term bridge loan that the company obtained on May 7, 1997.
The company's operations provided net cash of approximately $28,236,000 in the
first nine months of 1997. Although the company's operations generated
significant net cash during the first nine months of 1997, the company does not
expect significant positive net cash flow from operations in the fourth quarter.
The company incurred approximately $31,757,000 in capital expenditures for
office equipment, capitalized software and various spacecraft, launch vehicle
and other production and test equipment in the first nine months of 1997. The
company currently expects 1998 capital expenditures to be at least equal to 1997
expenditures.
On May 8, 1997, 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.
In connection with ORBCOMM's issuance in August 1996 of $170,000,000 of Senior
Notes due 2004, Orbital and Teleglobe Inc. each agreed, under certain
circumstances specified in the indenture governing the Senior Notes, to provide
ORBCOMM an aggregate amount not to exceed $15,000,000 in capital contributions
or debt financing expressly subordinated to the Senior Notes. ORBCOMM currently
believes that it may require some or all of such funding in early 1998.
Orbital expects that its capital needs for the remainder of 1997 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
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and equity financings to further realign its capital structure and to fund
potential capital requirements or acquisitions in 1998. In addition, the company
is assessing various equity and financing strategies in certain of its
subsidiaries.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 31, 1997, the U.S. District Court for the Eastern
District of Pennsylvania, pursuant to an agreement between the
parties, dismissed with prejudice the action brought by BTG USA,
Inc. ("BTG") against Magellan. Pursuant to the agreement, each party
agreed to bear its own cost of the action, and BTG further agreed to
certain restrictions on its right to litigate against Magellan in
the future.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
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 that precedes the exhibits filed with this
report.
(b) (i) On July 28, 1997, the Company filed a Current Report on
Form 8-K, dated July 11, 1997, disclosing that it had entered
into an agreement to acquire certain assets, including all
stock of certain subsidiaries, relating to the manufacturing
and communications services businesses of CTA INCORPORATED
(the "CTA Acquisition").
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(ii) On September 2, 1997, the Company filed a Current Report
on Form 8-K, dated August 15, 1997, disclosing that the
Company had completed the CTA Acquisition.
(iii) On September 9, 1997, the Company filed Amendment No. 1
on Form 8-K/A to its Current Report on Form 8-K, dated August
15, 1997, in order to reflect the Company's determination that
the CTA Acquisition was more appropriately reported pursuant
to Item 5 rather than Item 2.
(iv) On September 12, 1997, the Company filed a Current Report
on Form 8-K, dated September 11, 1997, disclosing that it
proposed to make an offering of convertible subordinated notes
not registered or required to be registered under the
Securities Act of 1933, as amended (the "Securities Act").
(v) On September 22, 1997, the Company filed a Current Report
on Form 8-K, dated September 17, 1997, disclosing that it had
completed its sale of $100 million convertible subordinated
notes in an offering not registered or required to be
registered under the Securities Act.
(vi) On October 1, 1997, the Company filed a Current Report on
Form 8-K, dated September 16, 1997, disclosing that its $100
million convertible subordinated notes were sold to initial
purchasers in the United States in reliance on an exemption
under Section 4(2) of the Securities Act, and resold by the
initial purchasers in the United States to "qualified
institutional buyers" pursuant to Rule 144A under the Act and
outside the United States to non-U.S. persons in reliance on
Regulation S under that Act.
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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: November 14, 1997 By: /s/ David W. Thompson
-----------------------------------------
David W. Thompson, President
and Chief Executive Officer
DATED: November 14, 1997 By: /s/ Jeffrey V. Pirone
-----------------------------------------
Jeffrey V. Pirone, Senior Vice President
and Principal Financial Officer
23
EXHIBIT INDEX
The following exhibits are filed as part of this report.
Exhibit No. Description
----------- -----------
4.1 Indenture dated as of September 16, 1997 between Orbital
Sciences Corporation and Deutsche Bank AG, New York
Branch
10.1 Second Amended and Restated Credit Agreement dated as of
August 5, 1997 among Orbital Sciences Corporation, Magellan
Corporation, the Banks listed therein and Morgan Guaranty
Trust Company of New York as Agent
10.4 Amended and Restated Security Agreement dated as of June 30,
1992 and amended and restated as of August 5, 1997 among
Orbital Sciences Corporation, Morgan Guaranty Trust Company of
New York as Collateral Agent and NationsBank, N.A., as
Designated Lockbox Bank
10.4.1 Security Agreement dated as of August 5, 1997 among Magellan
Corporation, Morgan Guaranty Trust Company of New York as
Collateral Agent and NationsBank, N.A., as Designated Lockbox
Bank
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 10-Q, or
otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934) (transmitted herewith).