##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-14279
 
 ORBITAL SCIENCES CORPORATION
  Delaware
(State of Incorporation of Registrant)
    
    06-1209561
(I.R.S. Employer Identification No.)
 21839 Atlantic Boulevard
Dulles, Virginia 20166
 (703) 406-5000
 þ o
 þ o
 o þ




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##### 



PART 1
 FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    146,443
    
    
    $
    125,504Restricted cash
    
    
    5,306
    
    
    
    8,315Receivables, net
    
    
    131,245
    
    
    
    149,480Inventories, net
    
    
    17,092
    
    
    
    13,565Deferred income taxes, net
    
    
    25,696
    
    
    
    26,710Other current assets
    
    
    6,694
    
    
    
    3,880Total current assets
    
    
    332,476
    
    
    
    327,454Property, plant and equipment, net
    
    
    82,843
    
    
    
    83,154Goodwill
    
    
    55,551
    
    
    
    55,551Deferred income taxes,net
    
    
    174,759
    
    
    
    185,940Other non-current assets
    
    
    9,450
    
    
    
    11,671Total Assets
    
    $
    655,079
    
    
    $
    663,770LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    76
    
    
    $
    161Accounts payable and accrued expenses
    
    
    99,337
    
    
    
    121,454Deferred revenues
    
    
    28,875
    
    
    
    19,478Total current liabilities
    
    
    128,288
    
    
    
    141,093Long-term obligations, net of current portion
    
    
    126,477
    
    
    
    128,375Other non-current liabilities
    
    
    109
    
    
    
    178Commitments and contingenciesStockholders equity:Preferred Stock, par value $.01; 10,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common Stock, par value $.01; 200,000,000 shares authorized, 54,739,227 and
52,823,032 shares outstanding, respectively
    
    
    547
    
    
    
    528Additional paid-in capital
    
    
    603,695
    
    
    
    618,232Deferred compensation
    
    
    
    
    
    
    (53
    )Accumulated deficit
    
    
    (204,037
    )
    
    
    (224,583
    )Total stockholders equity
    
    
    400,205
    
    
    
    394,124Total Liabilities and Stockholders Equity
    
    $
    655,079
    
    
    $
    663,770
 See accompanying notes to condensed consolidated financial statements
 1




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##### 



ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except share data)
 For the Quarters EndedSeptember 30,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Revenues
    
    $
    159,324
    
    
    $
    171,695Costs of goods sold
    
    
    129,211
    
    
    
    142,458Gross profit
    
    
    30,113
    
    
    
    29,237Research and development expenses
    
    
    1,077
    
    
    
    1,457Selling, general and administrative expenses
    
    
    16,803
    
    
    
    13,457Income from operations
    
    
    12,233
    
    
    
    14,323Interest expense
    
    
    (2,961
    )
    
    
    (2,847
    )Other income, net
    
    
    1,443
    
    
    
    521Debt extinguishment expense
    
    
    
    
    
    
    (577
    )Income before provision for income taxes
    
    
    10,715
    
    
    
    11,420Provision for income taxes
    
    
    (3,905
    )
    
    
    (25
    )Net income
    
    $
    6,810
    
    
    $
    11,395Basic net income per share
    
    $
    0.13
    
    
    $
    0.23Diluted net income per share
    
    $
    0.11
    
    
    $
    0.18
 See accompanying notes to condensed consolidated financial statements
 2




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##### 



ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except share data)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Revenues
    
    $
    503,876
    
    
    $
    500,751Costs of goods sold
    
    
    413,467
    
    
    
    416,946Gross profit
    
    
    90,409
    
    
    
    83,805Research and development expenses
    
    
    3,343
    
    
    
    4,654Selling, general and administrative expenses
    
    
    47,910
    
    
    
    38,653Settlement expense
    
    
    
    
    
    
    (2,538
    )Income from operations
    
    
    39,156
    
    
    
    43,036Interest expense
    
    
    (8,588
    )
    
    
    (8,645
    )Other income, net
    
    
    2,918
    
    
    
    1,174Debt extinguishment expense
    
    
    
    
    
    
    (1,138
    )Income before provision for income taxes
    
    
    33,486
    
    
    
    34,427Provision for income taxes
    
    
    (12,940
    )
    
    
    (486
    )Net income
    
    $
    20,546
    
    
    $
    33,941Basic net income per share
    
    $
    0.38
    
    
    $
    0.69Diluted net income per share
    
    $
    0.33
    
    
    $
    0.52
 See accompanying notes to condensed consolidated financial statements
 3




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##### 



ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Cash Flows From Operating Activities:Net income
    
    $
    20,546
    
    
    $
    33,941Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    10,536
    
    
    
    10,966Deferred income taxes
    
    
    12,302
    
    
    
    Amortization of debt issuance costs and debt discount
    
    
    459
    
    
    
    665Stock-based compensation and other
    
    
    (84
    )
    
    
    (374
    )Debt extinguishment expense
    
    
    
    
    
    
    1,138Changes in assets and liabilities and other
    
    
    (389
    )
    
    
    14,852Net cash provided by operating activities
    
    
    43,370
    
    
    
    61,188Cash Flows From Investing Activities:Capital expenditures
    
    
    (10,857
    )
    
    
    (8,562
    )Change in cash restricted for letters of credit, net
    
    
    3,041
    
    
    
    5,581Net cash used in investing activities
    
    
    (7,816
    )
    
    
    (2,981
    )Cash Flows From Financing Activities:Payments on long-term obligations
    
    
    (114
    )
    
    
    (9,672
    )Repurchase of common stock
    
    
    (19,999
    )
    
    
    (7,000
    )Net proceeds from issuances of common stock
    
    
    5,498
    
    
    
    17,228Net cash (used in) provided by financing activities
    
    
    (14,615
    )
    
    
    556Net increase in cash and cash equivalents
    
    
    20,939
    
    
    
    58,763Cash and cash equivalents, beginning of period
    
    
    125,504
    
    
    
    60,900Cash and cash equivalents, end of period
    
    $
    146,443
    
    
    $
    119,663
 See accompanying notes to condensed consolidated financial statements.
 4




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##### 



ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 and 2004
(Unaudited)
 (1) Basis of Presentation
    (2) Preparation of Condensed Consolidated Financial Statements
   5




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##### 



(3) Stock-Based Compensation
  3⁄4
  Quarters Ended September 30,2005
    
    
    2004Additional shares authorized for grant
at September 30
    
    
    2,997,839
    
    
    
    421,836Volatility
    
    
    58
    %
    
    
    65
    %Risk-free interest rate
    
    
    3.91
    %
    
    
    2.88
    %Weighted-average fair value per share
at grant date
    
    $
    4.97
    
    
    $
    3.96Expected dividend yield
    
    
    
    
    
    
    Expected life of options (years)
    
    
    3.5
    
    
    
    2.5
 Nine Months Ended September 30,2005
    
    
    2004Additional shares authorized for grant at
September 30
    
    
    2,997,839
    
    
    
    421,836Volatility
    
    
    58
    %
    
    
    65
    %Risk-free interest
rate
    
    
    3.57
    %
    
    
    3.06
    %Weighted-average fair value per share at grant
date
    
    $
    4.76
    
    
    $
    4.94Expected dividend yield
    
    
    
    
    
    
    Expected life of options (years)
    
    
    3.5
    
    
    
    2.5 - 4.5
 6




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##### 



(in thousands, except per share amounts)
 Quarters Ended September 30,2005
    
    
    2004Net income, as reported
    
    $
    6,810
    
    
    $
    11,395Stock-based employee compensation expense per fair-value-based method
    
    
    (377
    )
    
    
    (1,378
    )Pro forma net income
    
    $
    6,433
    
    
    $
    10,017Earnings per share:Basicas reported
    
    $
    0.13
    
    
    $
    0.23Basicpro forma
    
    $
    0.12
    
    
    $
    0.20Dilutedas reported
    
    $
    0.11
    
    
    $
    0.18Dilutedpro forma
    
    $
    0.10
    
    
    $
    0.15
 Nine Months Ended September 30,2005
    
    
    2004Net income, as reported
    
    $
    20,546
    
    
    $
    33,941Stock-based employee compensation expense per fair-value-based method
    
    
    (1,690
    )
    
    
    (5,416
    )Pro forma net income
    
    $
    18,856
    
    
    $
    28,525Earnings per share:Basicas reported
    
    $
    0.38
    
    
    $
    0.69Basicpro forma
    
    $
    0.34
    
    
    $
    0.58Dilutedas reported
    
    $
    0.33
    
    
    $
    0.52Dilutedpro forma
    
    $
    0.30
    
    
    $
    0.44
  (4) Industry Segment Information
   7




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##### 



(in thousands)
 Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Launch Vehicles:Revenues
    
    $
    79,798
    
    
    $
    80,153
    
    
    $
    247,636
    
    
    $
    243,150Operating income
    
    
    8,598
    
    
    
    8,065
    
    
    
    26,306
    
    
    
    22,188Identifiable assets
    
    
    107,080
    
    
    
    123,882
    (1)
    
    
    107,080
    
    
    
    123,882
    (1)Capital expenditures
    
    
    692
    
    
    
    1,132
    
    
    
    4,258
    
    
    
    2,725Depreciation and amortization
    
    
    1,303
    
    
    
    1,300
    
    
    
    4,031
    
    
    
    3,930Satellites and Related Space Systems:Revenues
    
    $
    74,755
    
    
    $
    86,551
    
    
    $
    242,034
    
    
    $
    241,755Operating income
    
    
    3,071
    
    
    
    5,956
    
    
    
    11,411
    
    
    
    17,390Identifiable assets
    
    
    138,937
    
    
    
    130,047
    (1)
    
    
    138,937
    
    
    
    130,047
    (1)Capital expenditures
    
    
    1,901
    
    
    
    1,961
    
    
    
    5,410
    
    
    
    4,623Depreciation and amortization
    
    
    1,211
    
    
    
    1,327
    
    
    
    3,618
    
    
    
    3,895Transportation Management Systems:Revenues
    
    $
    6,462
    
    
    $
    7,096
    
    
    $
    19,717
    
    
    $
    22,411Operating income
    
    
    564
    
    
    
    302
    
    
    
    1,439
    
    
    
    920Identifiable assets
    
    
    19,946
    
    
    
    23,124
    (1)
    
    
    19,946
    
    
    
    23,124
    (1)Capital expenditures
    
    
    113
    
    
    
    12
    
    
    
    300
    
    
    
    160Depreciation and amortization
    
    
    136
    
    
    
    177
    
    
    
    459
    
    
    
    560Corporate and Other:Revenues
    
    $
    (1,691
    )
    
    $
    (2,105
    )
    
    $
    (5,511
    )
    
    $
    (6,565
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,538Identifiable assets
    
    
    389,116
    
    
    
    386,717
    (1)
    
    
    389,116
    
    
    
    386,717
    (1)Capital expenditures
    
    
    63
    
    
    
    305
    
    
    
    889
    
    
    
    1,054Depreciation and amortization
    
    
    742
    
    
    
    858
    
    
    
    2,428
    
    
    
    2,581Consolidated:Revenues
    
    $
    159,324
    
    
    $
    171,695
    
    
    $
    503,876
    
    
    $
    500,751Operating income
    
    
    12,233
    
    
    
    14,323
    
    
    
    39,156
    
    
    
    43,036Identifiable assets
    
    
    655,079
    
    
    
    663,770
    (1)
    
    
    655,079
    
    
    
    663,770
    (1)Capital expenditures
    
    
    2,769
    
    
    
    3,410
    
    
    
    10,857
    
    
    
    8,562Depreciation and amortization
    
    
    3,392
    
    
    
    3,662
    
    
    
    10,536
    
    
    
    10,966
 
 (1) As of December 31, 2004 (5) Receivables
 (in thousands)
 September 30, 2005
    
    
    December 31, 2004Billed
    
    $
    42,333
    
    
    $
    54,800Unbilled
    
    
    89,111
    
    
    
    94,857Allowance for doubtful accounts
    
    
    (199
    )
    
    
    (177
    )Total
    
    $
    131,245
    
    
    $
    149,480
 8




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##### 



(6) Inventories
 (in thousands)
 September 30, 2005
    
    
    December 31, 2004Inventories
    
    $
    17,549
    
    
    $
    16,554Allowance for inventory obsolescence
    
    
    (457
    )
    
    
    (2,989
    )Total
    
    $
    17,092
    
    
    $
    13,565
  (7) Warranties
 (in thousands)
 Quarters Ended September 30,2005
    
    
    2004Balance at beginning of period
    
    $
    2,960
    
    
    $
    4,340Accruals during the period
    
    
    122
    
    
    
    318Reductions during the period
    
    
    (389
    )
    
    
    (1,118
    )Balance at end of period
    
    $
    2,693
    
    
    $
    3,540
 Nine Months Ended September 30,2005
    
    
    2004Balance at beginning of period
    
    $
    3,145
    
    
    $
    5,020Accruals during the period
    
    
    1,392
    
    
    
    656Reductions during the period
    
    
    (1,844
    )
    
    
    (2,136
    )Balance at end of period
    
    $
    2,693
    
    
    $
    3,540
 (8) Earnings Per Share
 (in thousands)
 Quarters Ended September 30,2005
    
    2004Weighted average of outstanding shares for basic EPS
    
    
    53,843
    
    
    
    50,358Dilutive effect of outstanding stock options and warrants
    
    
    8,020
    
    
    
    14,400Shares for diluted EPS
    
    
    61,863
    
    
    
    64,758
 Nine Months Ended September 30,2005
    
    2004Weighted average of outstanding shares for basic EPS
    
    
    54,684
    
    
    
    49,060Dilutive effect of outstanding stock options and warrants
    
    
    7,730
    
    
    
    16,203Shares for diluted EPS
    
    
    62,414
    
    
    
    65,263
 9




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##### 



(9) Comprehensive Income
  (10) Debt
    (11) Commitments and Contingencies
 U.S. Government Contracts
   Litigation
  10




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Consolidated Results of Operations for the Quarters and Nine Months Ended September 30, 2005 and
2004
 Revenues
  11




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##### 



Gross Profit
  Research and Development Expenses
 Selling, General and Administrative Expenses
 Settlement Expense
 12




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##### 



Interest Expense
 Debt Extinguishment Expense
 Other Income, Net
 Income Taxes
   Net Income
 Segment Results
  13




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##### 



(in thousands)
 Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Launch Vehicles
    
    $
    79,798
    
    
    $
    80,153
    
    
    $
    247,636
    
    
    $
    243,150Satellites and Related Space Systems
    
    
    74,755
    
    
    
    86,551
    
    
    
    242,034
    
    
    
    241,755Transportation Management Systems
    
    
    6,462
    
    
    
    7,096
    
    
    
    19,717
    
    
    
    22,411Corporate and Other
    
    
    (1,691
    )
    
    
    (2,105
    )
    
    
    (5,511
    )
    
    
    (6,565
    )Total
    
    $
    159,324
    
    
    $
    171,695
    
    
    $
    503,876
    
    
    $
    500,751Income from Operations:Launch Vehicles
    
    $
    8,598
    
    
    $
    8,065
    
    
    $
    26,306
    
    
    $
    22,188Satellites and Related Space Systems
    
    
    3,071
    
    
    
    5,956
    
    
    
    11,411
    
    
    
    17,390Transportation Management Systems
    
    
    564
    
    
    
    302
    
    
    
    1,439
    
    
    
    920Corporate and Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,538Total
    
    $
    12,233
    
    
    $
    14,323
    
    
    $
    39,156
    
    
    $
    43,036
 Third Quarter 2005 Compared With Third Quarter 2004
 Launch Vehicles
  14




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##### 



Satellites and Related Space Systems
  Transportation Management Systems
 Corporate and Other
 Nine Months Ended September 30, 2005 Compared With Nine Months Ended September 30, 2004
 Launch Vehicles
 15




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##### 



Satellites and Related Space Systems
  Transportation Management Systems
 16




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##### 



Corporate and Other
  Backlog
   Liquidity and Capital Resources
 Cash Flows from Operating Activities
 Cash Flows from Investing Activities
 Cash
Flows from Financing Activities
   17




---



##### 



Available Cash and Future Funding
  Off-Balance Sheet Arrangements
  18




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    ITEM 4. CONTROLS AND PROCEDURES
  19




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##### 



PART II
 OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
   ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5. OTHER INFORMATION
  ITEM 6. EXHIBITS
 Exhibits
 20




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##### 



SIGNATURES
  ORBITAL SCIENCES CORPORATIONDATED: October 25, 2005
    
    By:
    
    /s/ David W. ThompsonDavid W. ThompsonChairman and Chief Executive OfficerDATED: October 25, 2005
    
    By:
    
    /s/ Garrett E. PierceGarrett E. PierceVice Chairman and Chief Financial Officer
 21




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##### 



EXHIBIT INDEX
  Exhibit No.
    
    Description3.1
    
    Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1 to the companys Registration
Statement on Form S-3 (File Number 333-08769) filed and
effective on July 25, 1996).3.2
    
    Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005).3.3
    
    Certificate of Amendment to Restated Certificate of
Incorporation, dated April 29, 1997 (incorporated by reference
to Exhibit 3.3 to the companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).3.4
    
    Certificate of Amendment to Restated Certificate of
Incorporation, dated April 30, 2003 (incorporated by reference
to Exhibit 3.4 to the companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).3.5
    
    Certificate of Designation, Preferences and Rights of Series B
Junior Participating Preferred Stock, dated November 2, 1998
(incorporated by reference to Exhibit 2 to the companys
Registration Statement on Form 8-A filed on November 2, 1998).4.1
    
    Form of Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the companys Registration Statement on Form
S-1 (File Number 33-33453) filed on February 9, 1990 and
effective on April 24, 1990).4.2
    
    Warrant Agreement, dated as of August 22, 2002, by and between
Orbital Sciences Corporation and U.S. Bank, N.A., as Warrant
Agent (incorporated by reference to Exhibit 4.2 to the
companys Current Report on Form 8-K filed on August 27,
2002).4.3
    
    Form of Common Stock Purchase Warrant for Warrants Expiring
August 15, 2006 (restricted) (incorporated by reference to
Exhibit 4.4 to the companys Current Report on Form 8-K filed
on August 27, 2002).4.4
    
    Form of Common Stock Purchase Warrant for Warrants Expiring
August 15, 2006 (registered) (incorporated by reference to
Exhibit 4.4 to the companys Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003).
 22




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##### 



Exhibit No.
    
    Description4.5
    
    Rights Agreement dated as of October 22, 1998 between Orbital
Sciences Corporation and BankBoston N.A., as Rights Agent
(incorporated by reference to Exhibit 1 to the companys
Report on Form 8-A filed on November 2, 1998).4.6
    
    Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the companys Report on Form 8-A filed on
November 2, 1998).4.7
    
    Indenture, dated as of July 10, 2003, by and between Orbital
Sciences Corporation and U.S. Bank National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to the
companys Current Report on Form 8-K filed on July 18, 2003).4.8
    
    Form of 9% Senior Note due 2011 (incorporated by reference to
Exhibit 4.2 to the companys Current Report on Form 8-K filed
on July 18, 2003).10.1
    
    Orbital Sciences Corporation 1997 Stock Option and Incentive
Plan, amended as of April 28, 2005 (incorporated by reference
to Exhibit 10.1 to the companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005).10.2
    
    Orbital Sciences Corporation 2005 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the companys
Current Report on Form 8-K filed on May 2, 2005).10.3
    
    Form of Stock Unit Agreement under the 2005 Stock Incentive
Plan (incorporated by reference to Exhibit 10.2 to the
companys Current Report on Form 8-K filed on May 2, 2005).10.4
    
    Form of Stock Unit Agreement under the 1997 Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.3 to
the companys Current Report on Form 8-K filed on May 2,
2005).10.5
    
    First Amendment to Executive Relocation Agreement between
Orbital Sciences Corporation and Ronald J. Grabe, Executive
Vice President and General Manager, Launch Systems Group dated
April 28, 2005 (incorporated by reference to Exhibit 10.4 to
the companys Current Report on Form 8-K filed on May 2,
2005).31.1
    
    Certification of Chairman and Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (transmitted herewith).31.2
    
    Certification of Vice Chairman and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350) (transmitted herewith).32.1
    
    Written Statement of Chairman and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350) (transmitted herewith).32.2
    
    Written Statement of Vice Chairman and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350) (transmitted herewith).
 23