##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  
 FORM 10-Q
 (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  Commission file number 1-14279  
 ORBITAL SCIENCES CORPORATION  Delaware
    
    06-1209561(State of Incorporation of Registrant)
    
    (I.R.S. Employer Identification No.)
 21839 Atlantic Boulevard
Dulles, Virginia 20166
(Address of principal executive offices) (703) 406-5000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has 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 (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o As of April 20, 2005, 55,560,824 shares of the registrants Common Stock were outstanding.




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PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    130,960
    
    
    $
    125,504Restricted cash and cash equivalents
    
    
    8,285
    
    
    
    8,315Receivables, net
    
    
    155,317
    
    
    
    149,480Inventories, net
    
    
    12,931
    
    
    
    13,565Deferred income taxes, net
    
    
    26,791
    
    
    
    26,710Other current assets
    
    
    3,606
    
    
    
    3,880Total current assets
    
    
    337,890
    
    
    
    327,454Property, plant and equipment,net
    
    
    83,341
    
    
    
    83,154Goodwill
    
    
    55,551
    
    
    
    55,551Deferred income taxes,net
    
    
    181,961
    
    
    
    185,940Other non-current assets
    
    
    9,660
    
    
    
    11,671Total assets
    
    $
    668,403
    
    
    $
    663,770LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    102
    
    
    $
    161Accounts payable and accrued expenses
    
    
    126,361
    
    
    
    121,454Deferred revenues
    
    
    14,787
    
    
    
    19,478Total current liabilities
    
    
    141,250
    
    
    
    141,093Long-term obligations, net of current portion
    
    
    126,026
    
    
    
    128,375Other non-current liabilities
    
    
    625
    
    
    
    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, 55,557,284 and
52,823,032 shares outstanding, respectively
    
    
    556
    
    
    
    528Additional paid-in capital
    
    
    618,377
    
    
    
    618,232Deferred compensation
    
    
    
    
    
    
    (53
    )Accumulated deficit
    
    
    (218,431
    )
    
    
    (224,583
    )Total stockholders equity
    
    
    400,502
    
    
    
    394,124Total liabilities and stockholders equity
    
    $
    668,403
    
    
    $
    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) Quarters Ended March 31,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Revenues
    
    $
    167,149
    
    
    $
    151,372Costs of goods sold
    
    
    139,338
    
    
    
    126,454Gross profit
    
    
    27,811
    
    
    
    24,918Research and development expenses
    
    
    1,032
    
    
    
    1,742Selling, general and administrative expenses
    
    
    14,562
    
    
    
    11,509Settlement expense
    
    
    
    
    
    
    (2,538
    )Income from operations
    
    
    12,217
    
    
    
    14,205Interest expense
    
    
    (2,780
    )
    
    
    (2,909
    )Other income, net
    
    
    757
    
    
    
    426Income before income taxes
    
    
    10,194
    
    
    
    11,722Provision for income taxes
    
    
    (4,042
    )
    
    
    (228
    )Net income
    
    $
    6,152
    
    
    $
    11,494Basic net income per share
    
    $
    0.11
    
    
    $
    0.24Diluted net income per share
    
    $
    0.10
    
    
    $
    0.18
 See accompanying notes to condensed consolidated financial statements. 2




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##### 



ORBITAL SCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Three Months Ended March 31,2005
    
    
    2004(unaudited)
    
    
    (unaudited)Cash Flows From Operating Activities:Net income
    
    $
    6,152
    
    
    $
    11,494Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,636
    
    
    
    3,652Deferred taxes
    
    
    3,896
    
    
    
    Amortization of debt costs
    
    
    153
    
    
    
    234Stock-based compensation and contributions to defined contribution plan and other
    
    
    (204
    )
    
    
    (678
    )Changes in assets and liabilities and other
    
    
    (4,090
    )
    
    
    29,460Net cash provided by operating activities
    
    
    9,543
    
    
    
    44,162Cash Flows From Investing Activities:Capital expenditures
    
    
    (4,467
    )
    
    
    (2,628
    )Change in cash restricted for letters of credit, net
    
    
    30
    
    
    
    1,567Net cash used in investing activities
    
    
    (4,437
    )
    
    
    (1,061
    )Cash Flows From Financing Activities:Payments on long-term obligations
    
    
    (77
    )
    
    
    (69
    )Proceeds from issuances of common stock
    
    
    427
    
    
    
    2,241Net cash provided by financing activities
    
    
    350
    
    
    
    2,172Net increase in cash and cash equivalents
    
    
    5,456
    
    
    
    45,273Cash and cash equivalents, beginning of period
    
    
    125,504
    
    
    
    60,900Cash and cash equivalents, end of period
    
    $
    130,960
    
    
    $
    106,173
 See accompanying notes to condensed consolidated financial statements. 3




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##### 



ORBITAL SCIENCES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and 2004
(Unaudited) (1) Basis of Presentation Orbital Sciences Corporation (together with its subsidiaries, Orbital or the company), a
Delaware corporation, develops and manufactures small rockets and space systems for commercial,
military and civil government customers. The companys primary products are satellites and launch
vehicles, including low-orbit, geosynchronous and planetary spacecraft for communications, remote
sensing, scientific and defense missions; ground- and air-launched rockets that deliver satellites
into orbit; and missile defense systems that are used as interceptor and target vehicles. Orbital
also offers space-related technical services to government agencies and develops and builds
satellite-based transportation management systems for public transit agencies and private vehicle
fleet operators. In the opinion of management, the accompanying unaudited interim financial information
reflects all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation on a going concern basis. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted accounting
principles in the United States have been condensed or omitted pursuant to instructions, rules and
regulations prescribed by the Securities and Exchange Commission. The company believes that the
disclosures provided herein are adequate to make the information presented not misleading when
these unaudited interim condensed consolidated financial statements are read in conjunction with
the audited consolidated financial statements contained in the companys Annual Report on Form 10-K
for the year ended December 31, 2004. Operating results for the quarter ended March 31, 2005 are not necessarily indicative of the
results expected for the full year. (2) Preparation of Condensed Consolidated Financial Statements The preparation of condensed consolidated financial statements in conformity with generally
accepted accounting principles in the United States requires management to make estimates and
assumptions, including estimates of future contract costs and earnings. Such estimates and
assumptions affect the reported amounts of assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and earnings during the
current reporting period. Management periodically assesses and evaluates the adequacy and/or
deficiency of estimated liabilities recorded for various reserves, liabilities, contract risks and
uncertainties. Actual results could differ from these estimates. All financial amounts are stated in U.S. dollars unless otherwise indicated. 4




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(3) Stock-Based Compensation In
December 2004, Statement of Financial Accounting Standards
(SFAS) No. 123(R),
Share-Based Payment, was issued. SFAS No. 123(R) amends SFAS No. 123, Accounting for
Stock-Based Compensation, to require companies to recognize as expense the fair value of all
employee stock-based awards, including stock option grants. The company expects to adopt SFAS No.
123(R) on January 1, 2006, using the modified prospective application method, as defined under SFAS
No. 123(R). The company is currently assessing the expected impact on its consolidated 2006
financial statements and the anticipated changes to its compensation strategies, if any. Through March 31, 2005, the company applied the provisions of SFAS No. 123, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation 3⁄4 Transition and Disclosure, an amendment
of FASB Statement No. 123. Under those provisions, the company has provided pro forma net income
and earnings per share disclosures for its employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied (see below). The company has not recorded any
compensation cost associated with stock options issued to date since all such options had an
exercise price equal to the market value of the companys common stock on the date of grant. The company used the Black-Scholes option-pricing model to determine the pro forma impact
under SFAS Nos. 123 and 148 on the companys net income and earnings per share. The model utilizes
certain information, such as the interest rate on a risk-free security maturing generally at the
same time as the option being valued, and requires certain assumptions, such as the expected amount
of time an option will be outstanding until it is exercised or it expires, to calculate the fair
value of stock options granted. This information and the assumptions used for the quarters ended
March 31, 2005 and 2004 are summarized as follows: Quarters Ended March 31,2005
    
    
    2004Additional shares authorized for grant
at March 31
    
    
    499,688
    
    
    
    1,481,661Volatility
    
    
    57
    %
    
    
    65
    %Risk-free interest
rate
    
    
    3.39
    %
    
    
    2.27
    %Weighted-average fair value per share
at grant date
    
    $
    5.07
    
    
    $
    5.93Expected dividend
yield
    
    
    
    
    
    
    Expected life of options (years)
    
    
    3.5
    
    
    
    4.5
 5




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##### 



The following table illustrates the effect on net income and earnings per share if the
company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan
(in thousands, except per share amounts): Quarters Ended March 31,2005
    
    
    2004Net income, as reported
    
    $
    6,152
    
    
    $
    11,494Stock-based employee compensation expense per fair-value-based method
    
    
    (722
    )
    
    
    (1,190
    )Pro forma net income
    
    $
    5,430
    
    
    $
    10,304Earnings per share:Basicas reported
    
    $
    0.11
    
    
    $
    0.24Basicpro forma
    
    $
    0.10
    
    
    $
    0.21Dilutedas reported
    
    $
    0.10
    
    
    $
    0.18Dilutedpro forma
    
    $
    0.09
    
    
    $
    0.16
 Pro forma net income reflects only options granted through March 31, 2005 and, therefore,
may not be representative of the effects for future periods. (4) Industry Segment Information Orbitals space-related products and services are grouped into three reportable segments:
(i) launch vehicles, (ii) satellites and related space systems and (iii) transportation management
systems. Reportable segments are generally organized based upon product lines. Corporate and
other is comprised of the elimination of intercompany revenues and certain corporate items that
have not been attributed to a particular segment. Intersegment sales are generally negotiated and accounted for under terms and conditions that
are similar to other commercial and government contracts. Intersegment sales of $2.3 million and
$1.8 million were recorded in the quarters ended March 31, 2005 and 2004, respectively. 6




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The following table presents operating information for the quarters ended March 31, 2005 and
2004 and identifiable assets at March 31, 2005 and December 31, 2004 by reportable segment (in
thousands). Quarters Ended March 31,2005
    
    
    2004Launch Vehicles:Revenues
    
    $
    79,977
    
    
    $
    76,490Operating income
    
    
    8,988
    
    
    
    6,906Identifiable assets
    
    
    126,832
    
    
    
    123,882
    (1)Capital expenditures
    
    
    2,217
    
    
    
    993Depreciation and amortization
    
    
    1,390
    
    
    
    1,335Satellites and Related Space Systems:Revenues
    
    $
    82,410
    
    
    $
    69,380Operating income
    
    
    2,833
    
    
    
    4,451Identifiable assets
    
    
    133,600
    
    
    
    130,047
    (1)Capital expenditures
    
    
    1,931
    
    
    
    1,261Depreciation and amortization
    
    
    1,207
    
    
    
    1,266Transportation Management Systems:Revenues
    
    $
    7,067
    
    
    $
    7,331Operating income
    
    
    396
    
    
    
    310Identifiable assets
    
    
    22,911
    
    
    
    23,124
    (1)Capital expenditures
    
    
    134
    
    
    
    79Depreciation and amortization
    
    
    168
    
    
    
    198Corporate and Other:Revenues
    
    $
    (2,305
    )
    
    $
    (1,829
    )Operating income
    
    
    
    
    
    
    2,538Identifiable assets
    
    
    385,060
    
    
    
    386,717
    (1)Capital expenditures
    
    
    185
    
    
    
    295Depreciation and amortization
    
    
    871
    
    
    
    853Consolidated:Revenues
    
    $
    167,149
    
    
    $
    151,372Operating income
    
    
    12,217
    
    
    
    14,205Identifiable assets
    
    
    668,403
    
    
    
    663,770
    (1)Capital expenditures
    
    
    4,467
    
    
    
    2,628Depreciation and amortization
    
    
    3,636
    
    
    
    3,652
   (1)
 (5) Receivables Receivables consisted of the following (in thousands): March 31, 2005
    
    
    December 31, 2004Billed
    
    $
    61,990
    
    
    $
    54,800Unbilled
    
    
    93,528
    
    
    
    94,857Allowance for doubtful accounts
    
    
    (201
    )
    
    
    (177
    )Total
    
    $
    155,317
    
    
    $
    149,480
 7




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(6) Inventories Inventories consisted of the following (in thousands): March 31, 2005
    
    
    December 31, 2004Inventories
    
    $
    15,894
    
    
    $
    16,554Allowance for inventory obsolescence
    
    
    (2,963
    )
    
    
    (2,989
    )Total
    
    $
    12,931
    
    
    $
    13,565
 Substantially all of the companys inventory consisted of component parts and raw
materials. (7) Warranties The company has warranty obligations in connection with certain transportation management
systems contracts. The company records a liability for estimated warranty claims based upon
historical data and customer information. Activity in the warranty liability consisted of the
following (in thousands): Quarter Ended
    
    
    Quarter EndedMarch 31, 2005
    
    
    March 31, 2004Balance at beginning of period
    
    $
    3,145
    
    
    $
    5,020Accruals during the period
    
    
    343
    
    
    
    79Reductions during the period
    
    
    (689
    )
    
    
    (434
    )Balance at end of period
    
    $
    2,799
    
    
    $
    4,665
 (8) Earnings Per Share The following table presents the shares used in computing basic and diluted earnings per share
(EPS) (in thousands): Quarter Ended
    
    
    Quarter EndedMarch 31, 2005
    
    
    March 31, 2004Weighted average of outstanding shares for basic EPS
    
    
    55,157
    
    
    
    48,048Dilutive effect of outstanding stock options and warrants
    
    
    8,304
    
    
    
    17,322Shares for diluted EPS
    
    
    63,461
    
    
    
    65,370
 8




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(9) Comprehensive Income Comprehensive income in the quarters ended March 31, 2005 and 2004 was equal to net income.
Accumulated other comprehensive income as of March 31, 2005 and December 31, 2004 was $0. (10) Debt The following table sets forth the companys long-term obligations, excluding capital lease
obligations (in thousands): March 31, 2005
    
    
    December 31, 20049% senior notes, interest due semi-annually, principal due in July 2011
    
    $
    126,425
    
    
    $
    126,425Interest rate swap fair value hedge adjustment on $50 million of 9%
senior notes
    
    
    (487
    )
    
    
    1,844125,938
    
    
    
    128,269Less current portion
    
    
    
    
    
    
    Long-term portion
    
    $
    125,938
    
    
    $
    128,269
 The fair value of the companys senior notes at March 31, 2005 and December 31, 2004 was
estimated at $139.4 million and $142.5 million, respectively, based on market trading activity. The company has a $50.0 million revolving credit facility (the Revolver) with Bank of
America serving as the lead arranger. The company has the option to increase the amount of the
Revolver up to $25 million to the extent that any one or more lenders commits to be a lender for
such amount. Loans under the Revolver bear interest at LIBOR plus a margin ranging from 1.5% to
2.25% or at a prime rate plus a margin ranging from zero to 0.75%, with the applicable margin in
each case varying according to the companys ratio of total debt to earnings before interest,
taxes, depreciation and amortization. The Revolver is collateralized by the companys intellectual
property and accounts receivable. Up to $40.0 million of the Revolver may be reserved for letters
of credit. As of March 31, 2005, there were no borrowings under the Revolver, although $12.5
million of letters of credit were issued under the Revolver. Accordingly, as of March 31, 2005,
$37.5 million of the Revolver was available for borrowing. Orbitals 9% senior notes due 2011 and the Revolver contain covenants limiting the companys
ability to, among other things, incur more debt, pay cash dividends, make investments, redeem or
repurchase Orbital stock, enter into transactions with affiliates, merge or consolidate with others
and dispose of assets or create liens on assets. In addition, the Revolver contains financial
covenants with respect to leverage, secured leverage, fixed charge coverage, consolidated net worth
and the ratio of accounts receivable to senior secured indebtedness. As of March 31, 2005, the
company was in compliance with all of these covenants. In 2003, the company entered into an eight-year interest rate swap agreement with a financial
institution on a notional amount of $50.0 million, whereby the company receives fixed-rate interest
of 9% in exchange for variable interest payments. The interest rate is reset quarterly and is
equal to the 3-month LIBOR rate plus 4.28%. The total variable interest rate was 6.94% at March
31, 2005. This arrangement has been designated an effective fair value hedge of $50.0 million of
the companys 9% senior notes due 2011. As of March 31, 2005, the fair value of the
interest rate swap was a $0.5 million liability, which was recorded as a non-current liability with
an equal decrease in long-term debt on the consolidated balance sheet. 9




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(11) Commitments and Contingencies Contracts Most of the companys U.S. government contracts are funded incrementally on a year-to-year
basis. Changes in government policies, priorities or funding levels through agency or program
budget reductions by the U.S. Congress or executive agencies could materially adversely affect the
companys financial condition or results of operations. Furthermore, contracts with the U.S.
government may be terminated or suspended by the U.S. government at any time, with or without
cause. Such contract suspensions or terminations could result in unreimbursable expenses or
charges or otherwise adversely affect the companys financial condition and/or results of
operations. Litigation The company is party to certain litigation or other legal proceedings arising in the
ordinary course of business. In the opinion of management, the outcome of such legal
matters will not have a material adverse effect on the companys results of operations or
financial condition. 10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the exception of historical information, the matters discussed below under the headings
Consolidated Results of Operations for the Quarters Ended March 31, 2005 and 2004, Segment
Results, Backlog, Liquidity and Capital Resources, Off-Balance Sheet Arrangements and
elsewhere in this report on Form 10-Q include forward-looking statements that involve risks and
uncertainties, many of which are beyond our control. A number of important factors, including
those identified in our Annual Report on Form 10-K for the year ended December 31, 2004, may cause
actual results to differ materially from those anticipated or expected in any forward-looking
statement. We assume no obligation to update any forward-looking statements. We develop and manufacture small rockets and space systems for commercial, military and civil
government customers. Our primary products are satellites and launch vehicles, including
low-orbit, geosynchronous and planetary spacecraft for communications, remote sensing, scientific
and defense missions; ground- and air-launched rockets that deliver satellites into orbit; and
missile defense systems that are used as interceptor and target vehicles. We also offer
space-related technical services to government agencies and develop and build satellite-based
transportation management systems for public transit agencies and private vehicle fleet operators. Consolidated Results of Operations for the Quarters Ended March 31, 2005 and 2004 Revenues  Our consolidated revenues were $167.1 million in the first quarter of 2005,
a 10% increase compared to $151.4 million for the same quarter of 2004. This increase was driven
by substantial growth in our satellites and related space systems segment and an increase in our
launch vehicles segment. The increase in satellites and related space systems segment revenues is
largely attributable to science, technology and defense satellite contracts. Gross Profit  Our consolidated gross profit was $27.8 million and $24.9 million in
the first quarter of 2005 and 2004, respectively. Gross profit in the first quarter of 2005, as
compared to the same period in 2004, reflected increases of $2.4 million in our launch vehicles
segment, $0.3 million in our satellites and related space systems segment and $0.2 million in our
transportation management systems segment. The increase in gross profit in our launch vehicles
segment was largely due to an unfavorable profit adjustment in our launch vehicles segment on a
Taurus rocket contract recorded in the first quarter of 2004 that did not recur in 2005. Research and Development Expenses  Research and development expenses were $1.0
million and $1.7 million in the first quarter of 2005 and 2004, respectively. These expenses
related primarily to the development of improved launch vehicles and satellites. Selling, General and Administrative Expenses  Selling, general and administrative
expenses were $14.6 million and $11.5 million in the first quarter of 2005 and 2004, respectively.
Selling, general and administrative expenses increased primarily due to a $1.7 million increase in
bid and proposal costs and to increased personnel-related costs. Selling, general and
administrative
expenses include the costs of marketing, advertising, promotional and other selling expenses, as
well as the costs of our finance, legal, administrative and general management functions. 11




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Settlement Expense  In the first quarter of 2004, we recorded a $2.5 million gain as
a credit to settlement expense on the sale of senior subordinated notes which we had received from
a former affiliate. Interest Expense  Interest expense was $2.8 million and $2.9 million for the first
quarter of 2005 and 2004, respectively. Interest expense remained relatively constant
quarter-over-quarter primarily due to relatively similar balances of debt outstanding during the
periods. Income Taxes  In the fourth quarter of 2004, we reversed nearly all of our deferred
tax valuation allowance due to our assessment that substantially all of our deferred tax assets are
more likely than not realizable. This resulted in our recording significantly higher income tax
expense beginning in 2005, nearly all of which is offset by net operating loss carryforwards and
other deferred tax assets, resulting in minimal cash tax payments. We recorded $4.0 million of
income tax expense, at an effective income tax rate of 39.7%, in the first quarter of 2005. Our
cash income taxes, which primarily relate to alternative minimum tax (AMT), are currently less
than 2% of pretax income. In the first quarter of 2004, we recorded $0.2 million of income tax expense in the first
quarter of 2004, primarily related to AMT. Net Income  Our net income for the first quarter of 2005 was $6.2 million, compared
to net income of $11.5 million in the first quarter of 2004. Segment Results Our products and services are grouped into three reportable segments: (i) launch vehicles,
(ii) satellites and related space systems and (iii) transportation management systems. All of our
other activities, as well as consolidating eliminations and adjustments, are reported in corporate
and other. The following table summarizes revenues and income from operations for our reportable business
segments and corporate and other (in thousands): Quarters EndedMarch 31,2005
    
    
    2004Revenues:Launch Vehicles
    
    $
    79,977
    
    
    $
    76,490Satellites and Related Space Systems
    
    
    82,410
    
    
    
    69,380Transportation Management Systems
    
    
    7,067
    
    
    
    7,331Corporate and Other
    
    
    (2,305
    )
    
    
    (1,829
    )Total
    
    $
    167,149
    
    
    $
    151,372Income from Operations:Launch Vehicles
    
    $
    8,988
    
    
    $
    6,906Satellites and Related Space Systems
    
    
    2,833
    
    
    
    4,451Transportation Management Systems
    
    
    396
    
    
    
    310Corporate and Other
    
    
    
    
    
    
    2,538Total
    
    $
    12,217
    
    
    $
    14,205
 12




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##### 



First Quarter 2005 Compared With First Quarter 2004 Launch Vehicles  Launch vehicles segment revenues increased 5% primarily due to
higher revenues from our interceptor launch vehicles and our target launch vehicles product lines,
partially offset by a decrease in revenues from our space launch vehicles product line. In our
interceptor launch vehicles product line, we are developing and manufacturing interceptor boosters
designed to defend against hostile ballistic missile attacks, including the midcourse-phase Orbital
Boost Vehicle (OBV) and the boost-phase Kinetic Energy Interceptors (KEI) programs directed by the
U.S. Missile Defense Agency. Revenues from this product line grew $3.3 million
quarter-over-quarter, largely due to a ramp-up in KEI program activity. The interceptor launch
vehicles product line accounted for 57% and 56% of total segment revenues in the first quarters of
2005 and 2004, respectively. Revenues in our target launch vehicle product line increased $3.5
million in the first quarter of 2005 as compared to 2004. Revenues decreased $3.4 million in our
space launch vehicles product line. Operating income in the launch vehicles segment increased 30% primarily attributable to the
absence of an unfavorable profit adjustment on a Taurus space launch vehicle contract recorded in
the first quarter of 2004 that did not recur in 2005. Operating income from our missile defense
interceptor launch vehicles product line continued to be the largest contributor to this segments
operating income, reporting $6.0 million operating profit in the first quarter of 2005 and $6.1
million in the first quarter of 2004, or 66% and 89%, respectively, of total operating income in
this segment. The segments operating margin (as a percentage of revenues) was 11.2% in the first
quarter of 2005, compared to 9.0% in the first quarter of 2004. This increase in operating margin
was primarily the result of the 2004 Taurus contract profit adjustment discussed above. Satellites and Related Space Systems  Satellites and related space systems segment
revenues increased 19% primarily as a result of significant growth in revenues in our science,
technology and defense satellites product line, offset partially by lower revenues in our
communications satellites product line. Revenues increased $19.4 million in our science,
technology and defense satellites product line primarily due to increased revenues from
defense-related contracts awarded
in 2004 and late 2003. Revenues decreased $8.2 million in our communications satellites product
line primarily due to lower activity on certain contracts that are nearing completion, offset
partially by higher revenue from a communications satellite contract that was awarded in late 2003. 13




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Operating income in the satellites and related space systems segment decreased 36% due to
lower operating results in the communications satellites product line, partially offset by higher
income from science, technology and defense satellite contracts consistent with the revenue growth
in this product line. The decline in communications satellites operating results was due to lower
activity in 2005 on certain communications satellites which are nearly complete and, as mentioned
above, an operating loss on a communications satellite contract awarded late in 2003. This
segments operating margin (as a percentage of revenues) was 3.4% in the first quarter of 2005,
compared to 6.4% in the first quarter of 2004. While the operating margins remained relatively
constant in the science, technology and defense satellites and technical services product lines,
the operating margin in the communications satellites product line decreased significantly, due to
the factors noted above. Transportation Management Systems  Transportation management systems segment revenues
decreased marginally largely due to a reduction in revenue on several contracts that are nearing
completion, partially offset by revenue in the first quarter of 2005 on a contract that was
renegotiated and resumed in the third quarter of 2004. Operating income remained relatively consistent quarter-over-quarter, largely in line with
contract revenue trends. Corporate and Other  Corporate and other revenues are comprised solely of the
elimination of intercompany revenues. Corporate and other operating income in the first quarter of 2004 is comprised solely of the
gain on the sale of notes received from a former affiliate discussed above. Backlog Our firm backlog was $1.05 billion at March 31, 2005 and $1.17 billion at December 31, 2004.
We expect $405 million of the March 31, 2005 firm backlog to be recognized as revenue during the
remainder of 2005. Firm backlog consists of aggregate contract values for firm product orders,
excluding the portion previously included in revenues, and including government contract orders not
yet funded and our estimate of potential award fees. Total backlog was $2.38 billion at March 31, 2005 and $2.31 billion at December 31, 2004.
Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity
contracts and undefinitized orders and contract award selections. 14




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Liquidity and Capital Resources Cash Flows from Operating Activities  Cash flow from operations in the first quarter
of 2005 was $9.5 million, as compared to $44.2 million in the first quarter of 2004. Cash flow
from operations in the first quarter of 2005 was primarily attributable to cash provided by ongoing
business operations, including a $4.1 million net increase in assets and liabilities. Cash flow
from operations in the first quarter of 2004 was primarily attributable to cash provided by ongoing
business operations and a $29.5 million net reduction in assets and liabilities, including $25.4
million in customer cash payments received in advance of contract performance resulting in an
increase in deferred revenues on the balance sheet. Cash Flows from Investing Activities  We used $4.5 million and $2.6 million in the
first quarter of 2005 and 2004, respectively, for capital expenditures. In the first quarter of
2004, cash which had been restricted for letters of credit was reduced $1.6 million. Cash Flows from Financing Activities  During the first quarter of 2005 and 2004, we
received $0.4 million and $2.2 million, respectively, from issuances of common stock primarily in
connection with stock option exercises. The following table sets forth our long-term obligations, excluding capital lease obligations
(in thousands): March 31, 2005
    
    
    December 31, 20049% senior notes, interest due semi-annually, principal due in July 2011
    
    $
    126,425
    
    
    $
    126,425Interest rate swap fair value hedge adjustment on $50 million of 9%
senior notes
    
    
    (487
    )
    
    
    1,844125,938
    
    
    
    128,269Less current portion
    
    
    
    
    
    
    Long-term portion
    
    $
    125,938
    
    
    $
    128,269
 The fair value of our senior notes at March 31, 2005 and December 31, 2004 was estimated
at $139.4 million and $142.5 million, respectively, based on market trading activity. We have a $50.0 million revolving credit facility (the Revolver) with Bank of America
serving as the lead arranger. We have the option to increase the amount of the Revolver up to $25
million to the extent that any one or more lenders commits to be a lender for such amount. Loans
under the Revolver bear interest at LIBOR plus a margin ranging from 1.5% to 2.25% or at a prime
rate plus a margin ranging from zero to 0.75%, with the applicable margin in each case varying
according to our ratio of total debt to earnings before interest, taxes, depreciation and
amortization. The Revolver is collateralized by our intellectual property and accounts receivable.
Up to $40.0 million of the Revolver may be reserved for letters of credit. As of March 31, 2005,
there were no borrowings under the Revolver, although $12.5 million of letters of credit were
issued under the Revolver. Accordingly, as of March 31, 2005, $37.5 million of the Revolver was
available for borrowing. Our 9% senior notes due 2011 and the Revolver contain covenants limiting our ability to, among
other things, incur more debt, pay cash dividends, make investments, redeem or repurchase Orbital
stock, enter into transactions with affiliates, merge or consolidate with others
and dispose of assets or create liens on assets. In addition, the Revolver contains financial
covenants with respect to leverage, secured leverage, fixed charge coverage, consolidated net worth
and the ratio of accounts receivable to senior secured indebtedness. As of March 31, 2005, we were
in compliance with all of these covenants. 15




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In 2003, we entered into an eight-year interest rate swap agreement with a financial
institution on a notional amount of $50.0 million, whereby we receive fixed-rate interest of 9% in
exchange for variable interest payments. The interest rate is reset quarterly and is equal to the
3-month LIBOR rate plus 4.28%. The total variable interest rate was 6.94% at March 31, 2005. This
arrangement has been designated an effective fair value hedge of $50.0 million of our 9% senior
notes due 2011. As of March 31, 2005, the fair value of the interest rate swap was a $0.5 million
liability, which was recorded as a non-current liability with an equal decrease in long-term debt
on the consolidated balance sheet. Available Cash and Future Funding  At March 31, 2005, we had $130.9 million of
unrestricted cash and cash equivalents. Management believes that available cash, cash expected to
be generated from operations and borrowing capacity under the Revolver will be sufficient to fund
our operating and capital expenditure requirements in the foreseeable future. In April 2005, our Board of Directors authorized the purchase of up to $50 million of our
outstanding securities over the next 12 months. This repurchase program replaces the program
announced in 2004 that expired this month. We may repurchase our 9% senior notes due 2011, common
stock or common stock warrants that expire in 2006, or a combination thereof. Shares of common
stock may be purchased from time to time in the open market, by block purchase or in negotiated
transactions. The warrants and notes may be purchased in negotiated transactions. The timing,
amount and type of securities to be repurchased will be determined based on our loan covenants,
market conditions and other factors. The following outstanding securities are subject to the
repurchase program: $126 million of 9% senior notes due 2011; 55.6 million shares of common stock;
and approximately 82,000 warrants to purchase approximately 10.0 million shares of common stock
with an exercise price of $3.86 per share that expire in August 2006. Off-Balance Sheet Arrangements We believe that we do not have any material off-balance sheet arrangements, as defined by
applicable securities regulations, that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources. 16




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At March 31, 2005, we had $4.1 million of receivables denominated in Japanese yen and $4.9
million denominated in Singapore dollars. We are subject to market risk to the extent that future
fluctuations in foreign currency exchange rates impact these receivables. From time to time, we enter into forward exchange contracts to hedge against foreign currency
fluctuations on receivables denominated in foreign currency. At March 31, 2005, we had no foreign
currency forward exchange contracts. The fair market value of our outstanding 9% senior notes due 2011 was estimated at $139.4
million at March 31, 2005, based on market trading activity. In 2003, we entered into an eight-year interest rate swap agreement with a financial
institution on a notional amount of $50.0 million, whereby we receive fixed-rate interest of 9% in
exchange for variable interest payments. The interest rate is reset quarterly and is equal to the
3-month LIBOR rate plus 4.28%. The total variable interest rate was 6.94% at March 31, 2005. This
arrangement has been designated an effective fair value hedge of $50.0 million of our 9% senior
notes due 2011. As of March 31, 2005, the fair value of the interest rate swap was a $0.5 million
liability, which was recorded as a non-current liability with an equal decrease in long-term debt
on the consolidated balance sheet. We have an unfunded deferred compensation plan for executive officers and senior managers with
a total liability balance of $5.1 million at March 31, 2005. This liability is subject to
fluctuation based upon the market value of certain investment securities selected by participants
to measure the market fluctuations and to measure our liability to each participant. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that these disclosure controls and procedures were effective. There has been no change
in our internal control over financial reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. 17




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PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are party to certain litigation or proceedings arising in the ordinary course of
business. In the opinion of management, the probability is remote that the outcome
of any such litigation or proceedings will have a material adverse effect on our
results of operations or financial condition. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) Issuer Purchases of Equity Securities The following table sets forth information regarding our repurchase of common stock
during the quarter ended March 31, 2005. Total Number of
    
    
    
    Maximum NumberShares
    
    
    
    (or ApproximatePurchased as
    
    
    
    Dollar Value) ofTotal
    
    
    
    
    
    
    
    
    Part of Publicly
    
    
    
    Shares That MayNumber of
    
    
    
    Average Price
    
    
    
    Announced
    
    
    
    Yet Be PurchasedShares
    
    
    
    Paid Per
    
    
    
    Plans or
    
    
    
    Under the Plans orPeriod
    
    
    Purchased
    
    
    
    Share
    
    
    
    Programs1
    
    
    
    Programs1January 1, 2005 to
January 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    34,000,000February 1, 2005 to
February 28, 2005
    
    
    
    41,481
    2
    
    
    $
    10.53
    
    
    
    
    
    
    
    
    $
    34,000,000March 1, 2005 to
March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    34,000,000TOTAL
    
    
    
    41,481
    
    
    
    $
    10.53
    
    
    
    
    
    
    
    
    $
    34,000,000
    (2) Represents the total number of shares withheld to cover the tax withholding
obligations of certain employees upon the vesting of restricted stock. 18




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS  (a)
    Exhibits  A complete listing of exhibits required is
given in the Exhibit Index. 19




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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 CORPORATIONDATED: April 25, 2005
    
    By:
    
    /s/ David W. ThompsonDavid W. ThompsonChairman and Chief Executive OfficerDATED: April 25, 2005
    
    By:
    
    /s/ Garrett E. PierceGarrett E. PierceVice Chairman and Chief Financial Officer
 20




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EXHIBIT INDEX The following exhibits are filed with this report unless otherwise indicated. 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 September 30, 2004).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).
 21




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##### 



Exhibit No.
    
    Description4.7
    
    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).4.8
    
    Form of Rights Certificate (incorporated by reference to
Exhibit 3 to the companys Report on Form 8-A filed on
November 2, 1998).4.9
    
    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).4.10
    
    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).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).
 22