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Executives

David W. Thompson - Co-Founder, Chairman, Chief Executive Officer and President

Garrett E. Pierce - Vice Chairman and Chief Financial Officer

Analysts

Gary S. Liebowitz - Wells Fargo Securities, LLC, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Howard A. Rubel - Jefferies LLC, Research Division

Tyler Hojo - Sidoti & Company, LLC

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Orbital Sciences (ORB) Q3 2013 Earnings Call October 17, 2013 9:00 AM ET

Operator

Good morning, my name is Tracy and I will be your conference operator today. At this time, I would like to welcome, everyone to the Orbital Sciences Corporation Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. David Thompson, President and Chief Executive Officer, you may begin your conference.

David W. Thompson

Okay. Thank you, Tracy. Good morning, everyone. Thank you for joining us today to review Orbital's third quarter 2013 financial results. I'm Dave Thompson, and with me on the phone are Garrett Pierce and Barry Beneski.

Before we get underway, I'd like to ask everyone to take note of the Safe Harbor paragraph that appears at the end of our earnings release. This paragraph emphasizes the major sources of uncertainties and risk in the forward-looking statements that we will make today. So please keep these factors in mind as we discuss our future operational plans and financial outlook during this morning's call.

We'll follow our customary pattern for the call this morning. I'll begin by discussing some highlights from the third quarter and then turn it over to Garrett. He will cover our financial results in greater detail, update our guidance for the remainder of this year and provide a high-level preview of our current outlook for 2014. After that, I'll recap recent space missions and development and production program progress and also provide a preview of upcoming operational events over the next several months.

And finally, I'll address third quarter new orders and contract backlog and also discuss our new business pursuits for the remainder of this year. And at that point, we'll be ready to open up the call for your questions.

So I'll begin by highlighting several areas that characterize the company's most recent quarter. And Garrett and I will cover each of these topics in more depth later in this morning's call.

First though, let's look at our financial performance. Orbital's revenue in the third quarter was $322 million, which represented a decrease of about 14% compared to the same period last year. As was the case in the second quarter, the revenue drop was again due chiefly to delays that occurred earlier this year in receiving and then in starting work on several new commercial communication satellite contracts that are now ramping up and which should be visible in the fourth quarter.

Operating income in the third quarter was $25.6 million, which reflected a solid 8% margin on strong profit performance in both our launch vehicles and in our satellite and space systems business segments.

Net income was $15.6 million and earnings per share came in at $0.26. Free cash flow was a robust $31.5 million as CRS receivables declined. And this resulted in a quarter-ending cash balance of $241 million.

Next, let's take a quick look at operational highlights. Our third quarter was an outstanding one from an operational standpoint. The company conducted 6 major space missions, launched 4 smaller research rockets and delivered 3 additional systems for future uses. The most important events of the quarter were the successful launch of our second Antares rocket and the subsequent rendezvous and cargo delivery to the space station by our first Cygnus spacecraft. Other major operations included the early July flight of our 12th Orbital Boost Vehicle missile defense interceptor, all 12 of which have been successful, and the early September launch of our 24th Minotaur rocket, the first one to feature the Minotaur V configuration for high energy trajectories and another vehicle, which has developed a perfect flight record over the past dozen years.

Later in the call, I'll have more to say about recent operational achievements and our plans for a continued fast pace of rocket and satellite launches and delivery events in the final quarter of this year.

Finally though, let me give you a summary of our new business activity. New contract awards and option exercises totaled about $450 million in the third quarter. New business included firm and option orders for 2 communications satellites, 2 space launch vehicles and 6 target vehicles. Together, with new contracts and option exercises and from the first half of the year, third quarter activity boosted year-to-date new business volume to approximately $1.75 billion. Firm contract backlog at the end of September was $2.02 billion and total backlog was $5.40 billion. I'll have more details on third quarter orders and near-term new business pursuits a little later in the call.

Before that though, I'd like to ask Garrett to take you through the financial results from the quarter, to update our guidance for 2013, and to provide a general look at 2014 as we see it shaping up today. Garrett?

Garrett E. Pierce

Thank you, Dave and good morning. Before commenting on the financial results, I want to note that during this call, we will provide certain non-GAAP financial measures. A reconciliation of these measures to comparable GAAP financial measures can be found in our earnings release, or to the extent not addressed there, but discussed in this call, will be available as an appendix to the transcript of this call and will be posted under the Investor Relations heading on our website.

As Dave indicated, consolidated revenues for the third quarter 2013 were $322 million, down $51 million or 14% compared to revenues of $373 million in the third quarter of 2012. The reduction of revenues was primarily due to a $41 million decrease in the satellites and space systems segment that was mainly due to lower GEO satellite revenues. Launch vehicle segment revenues were down $13 million, primarily due to lower space launch vehicle revenues. Advanced space programs segment revenues increased $1 million.

Consolidated operating income was $25.6 million in the third quarter of 2013, resulting in an 8% operating margin, compared to $31.3 million, or 8.4% operating margin, in the third quarter of 2012. Satellites and space systems segment operating income decreased $4.1 million, consistent with the lower segment revenues. Advanced space programs segment revenues decreased $3.6 million, mainly due to a favorable contract close-out adjustment in the third quarter of 2012. Launch vehicles segment operating increase -- income increased $2 million.

Now I'd like to highlight certain factors in each of the 3 operating segments.

Launch vehicles segment revenues were $128 million in the third quarter of 2013, a decrease of $13 million compared to the third quarter of 2012. Space launch vehicle revenues were down $20 million and target launch vehicle revenues decreased $14 million, while missile defense interceptor revenues increased $20 million.

Launch vehicles segment operating income was $11.3 million, or 8.8% of revenues, an increase of $2 million compared to the third quarter of 2012. This is principally due to increased activity on missile defense interceptors.

Space -- satellites and space systems segment revenues were $88 million in the third quarter of 2013, down $41 million compared to the third quarter of 2012.

GEO satellite revenues were down $33 million due to the completion of several satellites since the third quarter of 2012 and the delayed award and startup of new GEO contracts.

Science and remote-sensing satellites revenues decreased $8 million due to the completion of a major contract earlier this year.

Satellites and space systems segment operating income was $8.1 million, down $4.1 million compared to last year's third quarter, which is consistent with the decrease in segment revenues. This segment's operating margin was 9.2% of revenues, down marginally from 9.4% operating margin reported in last year's third quarter.

The advanced space programs segment revenues were $121 million in the third quarter of 2013, up $1 million compared to the third quarter of 2012 due to activity on a new contract awarded this year, partially offset by lower CRS contract revenues and a favorable contract close-out adjustment in the third quarter of 2012.

The advanced space programs segment operating income was $6.2 million, or 5.1% of revenues, a decrease of $3.6 million compared to the third quarter of 2012. This decrease was primarily attributable to the favorable contract close-out adjustment in the third quarter of 2012.

Consolidated research and development expenses decreased by $9.8 million, principally due to a reduction in Antares research and development costs.

The GAAP income tax rate for the third quarter of 2013 was 37% compared to 33% for the third quarter of 2012. The third quarter of 2012 included a favorable adjustment related to research and development tax credits of $1.6 million or $0.03 per share.

Our full year 2013 GAAP effective tax rate is estimated to be approximately 37%, while our full year 2013 cash tax rate is estimated at 10%, reflecting the utilization of NOL and tax credit carryforwards.

EPS for the third quarter of 2013 was $0.26 per share compared to $0.33 per share for the third quarter of 2012. The EPS decreased $0.07 per share primarily due to a $5.7 million reduction in operating income that I just discussed. Our third quarter 2013 EPS also reflected a $1.4 million reduction in interest costs, resulting from a favorable refinancing of our debt last year and the impact of the higher effective income tax rate in 2013.

Free cash flow for the third quarter of 2013 was $31.5 million net of capital expenditures of $7.7 million. This quarter's free cash flow included cash generation by a $19 million reduction in receivables that was primarily driven by a reduction in our CRS contract receivable balance. Our cash balance stood at $241 million at the end of the quarter. In addition, we have a $300 million credit facility available.

We have updated our guidance for the full year 2013, lowering the top end of our revenues by $25 million, to a range of $1,370,000,000 to $1,400,000,000, as a result of lower forecasted GEO satellite revenues due to the delay in new contract awards that I previously highlighted. However, we are reaffirming our forecasted operating margin in the range of 7.5% to 8%, reflecting solid margins in our launch vehicles and space -- or launch vehicles and satellites space systems segments. Our guidance currently does not assume a significant, if any profit increase, on the CRS contract in 2013. However, we are very pleased with the outcome of the COTS test and demo -- demonstration missions and we are confident that the first CRS mission, which is expected to occur late this year, will be fully successful. We intend to revisit the profit margin rate on the CRS contract, which is currently at 5%, once the first mission results are known. Our reassessment of the CRS contract profit margin could result in a profit margin increase in the fourth quarter and/or in 2014.

Finally, we are reaffirming our EPS guidance in a range of $1.05 to $1.15 per share. In addition, we are reaffirming free cash flow in the range of breakeven to $20 million.

Due to the current uncertainties about the U.S. government budget levels, funding priorities and contract timing, Orbital has deferred providing specific financial guidance for 2014 at this time. However, at the present -- at present, the company's preliminary outlook for 2014 shows revenue growth of approximately 5%, as forecasted -- as compared to the forecast for 2013 results, with modestly lower operating margin income due to reduced satellite profitability. Free cash flow is expected to improve significantly to approximately $100 million in 2014. This preliminary outlook for next year is based on a variety of assumptions about future business conditions and operational events, including new business bookings, U.S. government budget levels and tax policies and progress on major development and production programs.

Thank you, and now, back to Dave.

David W. Thompson

Okay. Thanks, Garrett. I'll now update you on the company's major operational events that took place in the third quarter and provide a preview of what's ahead in the remainder of 2013.

Beginning with the third quarter, the second launch of Antares in mid-September was picture perfect and so was the rendezvous and birthing of the Cygnus spacecraft at the International Space Station and subsequent unloading of its roughly 1,500 pounds of cargo by the astronauts.

For Antares, the 5-month interval between its first launch in April and its second launch in September gives us confidence, both that the overall vehicle design is solid, and that we are in a good position to carry out 3 more Antares launches during the next 12 months.

For Cygnus, the near flawless in-orbit performance was a great testament to the work of the Orbital NASA team that designed, built, tested and operated the spacecraft, and also a clear indication of how capable and versatile an in-space logistics vehicle we now have for both space station cargo delivery and other advanced space missions.

All of the hardware for the third Antares and the second Cygnus is now at the final assembly facilities at Wallops Island and NASA is, just this week, providing about 3,000 pounds of cargo for which our first operational flight under the CRS contract will aim to make special delivery to the station before Christmas. At this point, the launch of the first CRS operational mission is set for between December 15 and December 21, with a rendezvous at the space station by the Cygnus spacecraft 2 or 3 days after the launch.

Beyond this next Antares and Cygnus flight, during the remainder of the year, we plan to conduct up to 8 major space missions to launch as many as 5 smaller research rockets, and also to deliver 5 additional systems for future uses in 2014.

In addition to the third Antares launch, with the second Cygnus spacecraft in December, our current schedule shows a Minotaur launch for the Air Force in mid-November and 2 target vehicle missions in late November and in December. We also have recently shipped, or will soon deliver, 3 new communications satellites for deployments in the months of November and December, assuming that launch vehicles are available on those schedules. If fully achieved, these operations would lead to a full year total of 46 space missions, 33 of which have been conducted to date.

I'll now take you through third quarter new business results and also discuss our outlook for the rest of this year. As I noted earlier, third quarter new business volume totaled about $450 million. The company's advanced space programs segment led the way, with about $250 million in new orders and options in the quarter. This was followed by our satellite segment with $160 million, and our launch vehicles segment with about $40 million of new business.

Particularly noteworthy, orders this past quarter included our first commercial satellite contract from DirecTV, several moderate-sized national security satellite contracts, an add-on to our Stratolaunch rocket program, and another production order for target vehicles

Looking ahead to the fourth quarter, Orbital is targeting between $600 million and $700 million in new orders and option exercises between now and the end of the year. These include pursuits for 1 or 2 more commercial satellite contracts, several small space launch vehicle and target vehicle orders, and another CRS cargo mission option exercise with NASA. Assuming a reasonable degree of success in pursuing these opportunities, the company would expect to generate between $2.3 billion and $2.4 billion in total new business for the full year. And assuming this outcome occurs, Orbital should begin 2014 with approximately 85% of this coming year's revenue already in our contract backlog.

To wrap-up, Orbital accomplished several important operational events in the third quarter, especially the successful Antares launch and Cygnus flight to the space station in our COTS demonstration mission last month. While revenues were weak due to a hiatus in commercial satellite production activity, our profit margins were once again somewhat better than we planned, and free cash flow is strongly positive, an indication of the substantial cash generation potential that we expect to realize over the next several years. We're now preparing for a busy fourth quarter of additional space missions and good, new business opportunities as we aim to conclude a very productive year for the company.

Thank you for your attention. We're now ready to open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Gary Liebowitz with Wells Fargo Securities.

Gary S. Liebowitz - Wells Fargo Securities, LLC, Research Division

Dave or Garrett, can you talk about the margins in satellites? I mean, usually when we see a revenue decline of this magnitude, we don't see sustainable margins like you posted, especially ones that are so much higher than what you've done historically. Can you talk about what's happening in that business? I know in the past you've talked about supply chain initiatives. But just in general, how are you keeping that margin where it is?

David W. Thompson

Let me start in responding to that question, Gary, what we -- what has taken place, over the last year or so, has been a slow -- until recently anyway, a slow rate of acquisition of new contracts, which I think now has turned around, together with the completion and delivery of, I think, 7 commercial satellites over the past 12 months, with one more coming up next month. Most of those satellite contracts that have been recently completed have come in with pretty much right on the numbers with respect to our expected cost. We have not really encountered any significant production or test problems over the past year, and as a result, we haven't consumed much, if any, of the cost reserves that we typically establish in those fixed-price contracts at the outset. Therefore, we've seen double-digit profit margins over the past 4 quarters. That's probably not sustainable in the near term. We don't expect to see that repeated in 2014. Hopefully, the cost and other cost reductions and other operational initiatives that we put in place a few years ago, will continue to pay off. But our delivery rate next year will not be as high as it has been, and so it's unlikely that we'll have opportunities in 2014 to realize those kind of pick-up adjustments. Perhaps in 2015, those will be realized, but we don't expect to see that happening next year.

Garrett E. Pierce

Okay. Let me just add to that, Gary. As you know, we are conservative on the front end of our -- of all of our programs or our -- and certainly, in our GEO programs, and we had some contracts this year. There were some challenges in the schedule, which we worked our way through, but that was not evident, obviously, until we were at the completion of the contracts. So we'd like to have a little bit more level recognition of profit, but we believe we should be conservative. And as we start new contracts, as Dave underlined, which we're doing now and into next year, there will be a reduction in profitability reported, but the target profitability, we certainly will be working to keep that as high as we possibly can.

Gary S. Liebowitz - Wells Fargo Securities, LLC, Research Division

Okay. And then Garrett, just 1 question. Just to clarify, the earnings -- the EPS guidance for this year does not include any of the CRS margin step-up in the fourth quarter? Because I think you're talking about...

Garrett E. Pierce

The high end, there could -- Gary, let me try to answer your question. The high end, there could be a small adjustment. It's not going to be significant. So the range we gave you to get to the very high end would need a small adjustment, but not significant. The adjustment or the lion's share of the adjustment will be recognized in 2014.

Gary S. Liebowitz - Wells Fargo Securities, LLC, Research Division

Okay. And even if -- yes, if you have a successful mission in December and a favorable assessment of the mission, it doesn't come until January. Can you still record that benefit in December?

Garrett E. Pierce

We'd have to make an assessment. We could, yes.

Operator

Your next question is from Michael Ciarmoli with KeyBanc Capital Markets.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Nice work on getting the free cash flow up and running here, especially for next year. Just if I can, on the CRS contract, how should we be thinking about this follow-on contract or additional option exercises with regards to the operating margin? It would seem like you guys could be in position to potentially land that order at a much higher rate. And just looking for some context around what the profit picture on those next orders could be.

David W. Thompson

Okay. Yes, thanks, Michael. With respect to the follow-on or the extension to the existing CRS program, we don't have a real high degree of clarity on NASA's plans at this stage. I would say that sometime between mid and late 2014, we would expect to have either an opportunity for an extension of the current contract or an opportunity to propose on a follow-on. Our current schedule for the 8 missions under today's contracts indicates that those flights will be completed by the end of 2016. And so sometime by mid-year, we would anticipate, just based on the normal lead times involved, either an extension of the existing contract, perhaps to cover a handful of missions in '17 and '18, or the award of a new contract going all the way through 2020 or beyond. As we move even under the current contract into some of the missions that are scheduled now in 2015 and '16, we are, for those individual missions, seeing certainly costs coming down. And so we would anticipate for either an extension of the existing contract or a new contract to be in a position to provide some combination of lower prices and higher profit margins for follow-on work. For this year, we will probably reach a temporary peak in CRS-related revenue, which should be up just a little bit in 2013 compared to 2012. We anticipate a drop-off next year because we don't think that we'll see much in the way of revenue in 2014 from any extension or new contract that will really start to manifest itself in a more significant way in 2015 and in the years beyond that.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay, perfect. That's helpful. And then just the other one I had on free cash flow. Certainly, as the receivable for the CRS contract unwinds, you're going to get a nice working capital tailwind there. What should we be thinking about in terms of future capital expenditures? I know you kind of got the extended Cygnus capsule you're working on. But how should we think we think about maybe some of the headwinds that might impact free cash flow, just as you need to build more rockets, as you may be take Antares into the commercial space? Can you give us a sense of what the capital expenditure profile might look like?

David W. Thompson

Well, for the reasons that Garrett indicated earlier, we don't want to be too specific about the 2014 outlook just yet. What I can tell you in fairly general terms though is that we do see both capital expenditures and research and development expenditures moving back to what we would think there's a more normal level with a good bit of that movement being achieved next year. So you can think of CapEx next year as being likely below 3% of revenue and R&D probably being in the range of about 3% of revenue, which would be not all the way to the long-term model, but big steps in that direction. And in addition, as we did some years ago before the big investment phase in the Antares launch vehicle and the Cygnus spacecraft, we see our free cash flow model pretty quickly returning to the 7% to 8% of revenue range, beginning next year and potentially even being a little stronger than that for the several year period after next year as those CRS receivables decline.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay, perfect. That's very helpful. And just one housekeeping. I know you don't want to talk too much about '14. What should we be thinking about in terms of the tax rate?

Garrett E. Pierce

37% is probably a good rate to use.

Operator

Your next question is from Patrick McCarthy with FBR.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Just given the government uncertainty, I was pleasantly surprised with the cash flow guidance for next year. But I was wondering what type of budget environment are you contemplating in that $100 million? And since the NASA CRS is essentially cash flow you've already earned, is that -- is there any risk to that given what's going on with the budget?

David W. Thompson

Good questions. Patrick, well, it's really tough to connect the dots between the large -- the questions surrounding the large top line budget levels and the individual programs that we're involved in. I could say, in general, that we are factoring in our outlook for next year, something that approximates the second year of the sequester. So if the new super committee that has been established to work out a 2014 budget comes up with something that's more favorable than that, that would be good. But for the time being, we are assuming, as best we can, make the connections, essentially, a full 2014 sequester impact. At the level of our business, I think there's some areas that are relatively protected from that, others that are a little bit more exposed. I think CRS is in the former category, pretty well protected. Some of our science programs, and potentially some of our national security satellite programs may be a little bit more vulnerable. But I think missile defense will be okay. I think our human spaceflight work also be in pretty good shape.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay, great. And then just looking at the fourth quarter, are there any other big pieces besides the GEO sat ramp up that gets you the sequential growth in the fourth quarter?

David W. Thompson

The other major -- there are some puts and takes, but the other major factor is the -- all of our -- with the COTS mission substantially completed, all of our Antares and Cygnus activity in the fourth quarter now will be on the CRS missions. Up until now, the big push, certainly earlier this year and in the third quarter, the big push was on completing the COTS demonstration mission. And that did not generate any Cygnus-related revenue because that was covered by the shared R&D agreement with NASA and it generated Antares revenue that was eliminated in consolidation for the same reason. So all those people and the subcontractors and so on that were focused earlier in the year on the test mission and in the demonstration mission under the COTS program are now turning attention fully to the CRS program. And so we'll see a revenue -- a significant revenue pickup coming as a result of that change in focus.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay, that's great. And then just one more quick one. When you do raise margin-to-margin profile on the CRS program, is there a way that we should be modeling it between the contribution that will be going to the launch vehicles versus what will be going to advanced space?

David W. Thompson

That's a fair question. I don't think -- at this point, I would say the simplest way to handle it would be to just assume comparable margin increases on both sides.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay, terrific.

David W. Thompson

It may not turn out exactly that way, but that's probably not a bad way to approximate it.

Operator

Your next question comes from Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies LLC, Research Division

I'm going to start maybe 2 accounting questions and then for -- to harass Garrett, and then a couple of market questions for you.

David W. Thompson

Okay. Well, he's always eager, so.

Howard A. Rubel - Jefferies LLC, Research Division

Nice cash flow, frankly. And that's a -- it's nice to see the direction is the way you've booked for it to be. But first, with respect to R&D and the indication that it's going to decline, a chunk of that is going to be attributable to lower revenues next year. How should we think about the split between what will be company-sponsored R&D that directly impacts the bottom line and what will be just a loss in revenues, Garrett, or a decline?

Garrett E. Pierce

Well, it'll be principally company-sponsored. We're done with the COTS program. The research and development we've done on Antares has been picked up on our rates, and that's -- will drop off significantly. So as Dave indicated, we're going to start to approach ratios of research and development to revenue in the 3% range or so. So it will come down. It will be principally be company-sponsored. We have R&D programs in our satellite group that are not nearly the size or scope of what we've done over the last 5 years, but they're important. And there will be some expenditures on that, it'll be company-financed.

Howard A. Rubel - Jefferies LLC, Research Division

That's -- I get it. And then if I recall in the past, the benefit from the potential inception date pick up related to the CRS mission was sort of incorporated into the guidance. And then now appears as if you're pushing it out or hedging it a little bit, which would say that you feel comfortable that the core business is maybe doing a little better than where you thought it would be at the beginning of the year. Is that a fair assumption?

Garrett E. Pierce

That's a fair and reasonable assumption. Needless to say, we have to execute. But that's a fair and correct assumption.

Howard A. Rubel - Jefferies LLC, Research Division

And then just 2 on market-related things for David. Now that you've got a couple of Antares launches, of course, I want to extrapolate that customers are going to line up and buy the service. What kind of discussions, or could you characterize the interest in the marketplace for the launch vehicle?

David W. Thompson

Yes. I think with 2 really good launches now under our belt, things are picking up in terms of customer interest. We have 1 specific pursuit that we're engaged in now with a commercial customer. Proposal will be submitted this quarter and we're anticipating a decision in the first quarter of next year, hopefully a positive one. And then as we look a little farther into 2014, I think we've got a decent opportunity, mid-to-late year, in the government market as well. So with the -- until we got a few launches under our belt, it was -- there's a limit to what we could reasonably do there. But with these 2 launches, particularly being as smooth as they both were, I think customer interest now is pretty high.

Howard A. Rubel - Jefferies LLC, Research Division

You've now reinforced my view that equity analysts can draw a straight line between 2 points. The second question is if you look at the, I'll call it the disruption associated with the federal budget and some of the other items, it's impressive that you didn't call out more of a change related to NASA. And why was that? I mean, because I think you didn't have access to facilities. Do you make it up? Or how do you see your customer reacting as you go forward?

David W. Thompson

Well, fair points. During the last couple of weeks, when things were largely shut down, the impacts on us were pretty modest with regard to current business. All of our contracts were well-funded, so we had no problems there. Government services, particularly in-production inspections, were handled pretty well because some of the programs were exempted and because government inspections either were not scheduled during that interval or were performed through other means. The 1 area where we did have some slowdown related to facility access, fortunately, our activities related to Antares and Cygnus were not impacted. The space station program was exempted from the shutdown. So our work in Antares processing at Wallops Island continued without interruption. There were some areas, however, where we did have limitations. And I think the effect of that was -- in terms of short-term revenue, was probably a couple million dollars a week, maybe $5 million in total, because of just not having access to the facilities at a couple of different places. Looking ahead, although we can certainly find ourselves in a similar situation early next year, as best we can tell today, Howard, again, factoring in as much as it's possible to do this, a full second year of sequestration, it appears that NASA, although likely to experience a budget reduction, will probably fare relatively well compared to some of the other agencies that are in the space and missile market. Right now, our crystal ball would have NASA fiscal '14 budget down, actually, fairly close to '13 and down maybe 5%, 6%, 7%, something like that, compared to fiscal '12. Some of the other agencies, missile defense and some of the military space programs would probably be down more down than that. But on the NASA side , I think the reduction's likely to be single digits, not that that'll be a trivial reduction, but better than many agencies are likely to experience. And then within NASA, the way that reduction is likely to be applied, will vary. And that's why I said earlier that, while we feel like the human space program activity, and particularly for us on the CRS contract, will be okay that we may see a squeeze on science of satellites, which is unfortunate, but I suspect that's a realistic outlook.

Howard A. Rubel - Jefferies LLC, Research Division

I'm sorry to just do this to you, but the Air Force and I guess, the country sort of is struggling with what to do with weather satellites. And you seem to have developed a lot of new platforms with both your acquisition and sort of your general capability. Could you just address that for a moment? And then I'm done.

David W. Thompson

Well, on the weather satellite topic, some years ago, a decision was made to combine the civil government and the defense weather satellites into a single program. It turns out, for a number of reasons, that didn't work very well. And so a couple of years back, that decision was reversed. And so now, NASA, acting on behalf of NOAA, is in charge of the civilian weather satellite program, and the Air Force, on behalf of itself and the other national security customers, has the lead on the military program. On the military side, there are several previous generation weather satellites that have been built, and as a result, there's no great urgency for the Air Force to move forward with new weather satellites over the next couple of years. At some point later in the decade, that will not be the case. But for the next couple of years, they've got their needs covered. I think the bigger question mark surrounds things on the civil side where the need will become somewhat more urgent. And it remains to be seen whether exactly how that will manifest itself in near-term budgets. But on the military side anyway, we don't see a lot of money going into new weather satellites for at least the next couple of years.

Operator

Your next question is from Tyler Hojo with Sidoti & Company.

Tyler Hojo - Sidoti & Company, LLC

Just firstly, in regards to your commentary in regards to operating margin levels being down in 2014, I'm just curious, does that anticipate a step up on the CRS margins in 2014?

David W. Thompson

Tyler, well, the outlook is, and it certainly could vary from this depending on the timing and magnitude of the step-up, the outlook is for somewhat improved margins next year compared to this year in 2 of our 3 segments, namely launch vehicles and advanced programs. And not altogether, coincidentally, those are the 2 segments that are involved in the CRS program, but a significant margin drop-off in our third segment, so satellites and space systems. And to just come back to a point that Garrett discussed in response to an earlier question and that I also mentioned, the satellite outlook for next year, it's not particularly bad by historical standards, and in fact, from a revenue standpoint, we see a quite a bit of growth in the satellite segment. But in comparison to this year, and for that matter, even in comparison to last year, when the satellite segment benefited from these very high margins as a result of favorable contract close-outs in the commercial satellite business, we don't expect to see that repeated in 2014. So without getting too quantitative, I think the margin outlook generally is up in 2 of the 3 segments, but down significantly in the third segment. Putting all that together, we're looking for a modest drop in consolidated operating margins next year, driven by something like a return to normal levels if you go back and look at, say, a couple year average before 2012, in the satellite segment.

Tyler Hojo - Sidoti & Company, LLC

Okay. But just in regards to the CRS program specifically, I mean, should we be thinking about this as a contract that likely will generate 6%-type operating margins in 2014?

David W. Thompson

It's probably premature to be too specific on that. I'd say at this point, I'm optimistic that we'll see some kind of improvement. But in terms of the magnitude, I think we should just wait on that.

Tyler Hojo - Sidoti & Company, LLC

Yes, that's fair. Okay. And then just lastly, I was hoping that, as you typically do, David, just if you could update the 2013 guidance by segment?

David W. Thompson

Yes, sure. I think I can do that. With regard to launch vehicles, I'll give you some -- single numbers, but I would suggest putting a plus or minus $3 million to $5 million on each of these. So launch vehicles, probably around $550 million in full-year revenue. Again, plus or minus a little bit. Satellite and space systems, $400 million, plus or minus a little bit. Advanced space programs, about $480 million, maybe plus, I guess minus, too, but maybe a little bit more on the plus side there. So that's the revenue outlook by segment. What that implies is growth in launch vehicles, advanced programs compared to the prior year and a significant decline in revenues in satellites and space systems for the reasons mentioned earlier. From an operating margin standpoint, launch vehicles should be north of 8%, probably not all the way to 8.5%, but somewhere in the low 8% range. That would represent 100 -- maybe 125 basis point improvement over the prior year. Satellites, in the neighborhood of 8.5%. That's down a bit from very good levels in 2012. I think they were about 9.25% in 2012. And the advanced programs' probably down a little bit because of business mix, a little over 6% likely for the full-year 2013. Those also ought to be taken as kind of midpoint with some range, plus or minus around those.

Operator

Your next question is from Bill Loomis with Stifel Nicolaus.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Let's see, Garrett, can you -- what was the unbilled balance on the CRS contract? And can you just explain -- you mentioned that you got paid down a little bit in the quarter, but I thought most of the pay down won't happen until the CRS 1 launch. And if you could just talk about that and how that builds up to the $100 million next year. And then I have a follow-up.

Garrett E. Pierce

The unbilled receivables, as I indicated in the call a moment ago, dropped by about $20 million in the quarter. So at the end of June, they were $343 million at the end of September, or $322 million. So that contributed by a reduction of working capital, a reduction of receivables, as we monetize those. As we look into next year, we will start to generate very good cash flow from the CRS contracts. As we complete the year, we'll probably be what, 70%, I think completed on the contract. So that will contribute to it. The dynamics of the cash flow from the contracts and expenditures, I just don't have that nor can I discuss that with you now, but it's a major contributor to the positive cash flow. Our other business units will also contribute to positive cash flow, but it's one of the ingredients. So the deferral that we've had on the balance sheet on receivables will start to unwind in 2014 and '15 as we move out on the final execution of CRS.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And you'll still have some retention, 20% or so, until success -- launch success, and then mating with the space station and so forth?

Garrett E. Pierce

Yes, there's a final report that comes out that Orbital will have the ability to make the judgment. Once the mission is completed, there's a final report that comes out that we're in close contact with NASA. But that's the general idea, yes.

David W. Thompson

What I can add to that, Bill, is our schedule at this point -- I kind of alluded to this in a general way, for the first 3 of the 8 CRS missions, is that the first of those is expected to take place in December, although the mission itself isn't completed until the Cygnus departs the space station. So if we arrive in late December, we're not going to depart until probably the end of January. The second of the CRS missions, right now, is we're aiming for sometime between mid-April and early May, with that mission also being completed roughly a month later. And then the third of the 3 would be sometime between late September and mid-October of next year. The final cash payments on each of those 3 missions are not billable until the missions are completed, and typically, not collectible for some weeks until -- or some weeks following when they're billed. So with all those being done, if we hit that schedule next year, there's a fair amount of cash that will be collected. On the other hand, we'll also be building up receivables for CRS Missions 6, 7 and 8. And the net of all that is certainly positive, but the dynamics get a little complicated. What I think we could say at this point is on a very preliminary basis for our cash flow outlook next year, probably about 2/3 of that free cash flow relates to CRS, and maybe a little less than that. But 60-plus percent of it anyway relates to CRS and the other 40-or-so percent from all the other lines of business.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And then on the commercial Antares pursuit that you have, the one that you could say could be awarded next year, what's the pipeline beyond that? And then what type of revenue and margin profile, generally speaking, not for that specific one, could we expect for a commercial Antares launch?

David W. Thompson

What we've been aiming for, for some time would be to get by the 2016-or-so period into a launch rate of 3 or 4 per year. And if it's 4 per year, half of those would be CRS missions and half would be other customers and -- of the pursuit that I mentioned, that I think the first -- there could be 2 missions from that, I think the first 1 would be launched in 2016. A little longer term, we would hope to see the annual flight rate increase 5 to 6 per year by the end of the decade, with roughly a 50-50 mix between follow-on space station, logistics missions and other missions, both government and commercial. Beyond the specific opportunity that we're pursuing now though, I think the best opportunities in the second half of next year are going to be with NASA and probably with defense customers.

Okay. Thank you, Bill.

I want to thank you all for your attention this morning. And I think we're ready to bring the discussion to a close. Thanks, again for joining us today.

Operator

Thank you for joining ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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