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Orbital Sciences (NYSE:ORB)

Q1 2014 Results Earnings Conference Call

April 17, 2014, 9:00 a.m. ET

Executives

David Thompson - Chairman, CEO, and President

Garrett Pierce - CFO

Barry Beneski - SVP, Communications

Analysts

Patrick McCarthy - FBR Capital Markets

Chris Quilty - Raymond James

Tyler Hojo - Sidoti & Company

Greg Konrad - Jefferies

Kevin [Jevatoni] - Keybanc Capital

Gary Liebowitz - Wells Fargo

Operator

Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to the first quarter 2014 financial results conference call. [Operator Instructions] I’d like to turn the call over to Mr. David Thompson. Mr. Thompson, you may begin.

David Thompson

Okay. Thank you, and good morning, everyone. Thanks for joining us today to discuss Orbital's first quarter 2014 financial results. I'm Dave Thompson, and with me on the phone this morning are Garrett Pierce and Barry Beneski.

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

We'll follow our customary outline for the call this morning. I'll begin by discussing some highlights from first quarter and then turn it over to Garrett. He will cover the financial results in greater detail and also update our guidance for the year.

After that, I'll come back and recap recent space missions and other delivery events and also preview upcoming operational activity over the next 3 months or so. And then finally, I'll address new orders and contract backlog, as well as our new business outlook for the next five or six months. At that time, we'll open up the call for your questions.

So let’s begin with some highlights from the company’s first quarter. As we ordinarily do, Garrett and I will cover each of these in more depth later on in this morning’s discussion. First, let’s take a look at our financial performance. For Orbital’s first quarter, revenue was down about 3% to $323 million. Operating margins were 7.1% and earnings per share came in at $0.23 per share.

Each of these figures was adversely affected by an in-orbit problem that developed with a recently launched communications satellite. On the positive side, the free cash flow in the quarter was a robust $87 million. This set a new company record for quarterly cash flow and boosted our cash balance to just over $350 million at the end of March.

Despite the somewhat slow start due to the charges for the satellite problem, we are maintaining our revenue profit margin and earnings per share guidance and increasing our cash flow guidance for the year, as Garrett will discuss shortly.

Second, let’s turn to some operational highlights. In the first quarter, Orbital carried out four major space missions, launched one smaller research rocket, and delivered six additional systems for future uses. The major missions included the third launch of our Antares rocket and the second flight of our Cygnus spacecraft, as well as two launches and deployments of commercial communications satellites.

The second of these commercial satellites, Amazonas 4A, was launched in late March and experienced a partial electrical system failure about two weeks ago. If it cannot be fixed, this problem will likely reduce the transponder capacity of the satellite during its 15-year operational lifetime. Our first quarter financial results reflect a conservative approach to accounting for the revenue and profit impacts of this situation, as Garrett will also discuss.

Looking ahead, we expect to conduct five major missions in the second quarter, including another Antares launch and Cygnus cargo flight to the space station, which is currently scheduled to commence in early May. We also plan to launch three missile defense interceptors and targets plus four or five smaller research rockets and deliver nine additional satellites and launch vehicles in the second quarter.

For the full year, Orbital continues to anticipate conducting an average of about one space mission or system delivery every week throughout 2014. We’re on track for that now, and I’ll have more details on our operational activity later in the call.

Finally, here’s a summary of first quarter new business activity. New contract awards and option exercises totaled about $495 million in the first quarter. These included orders for five spacecraft and space launch vehicles, along with other add-ons to existing work.

As a result, our firm contract backlog increased to just under $2.3 billion, an increase of nearly 15% compared to this time last year. This is a good leading indicator of stronger revenue growth over the next three or four quarters. In fact, we now have about [90%] of this year’s targeted revenue in backlog, and nearly 70% of next year’s revenue in backlog as well.

Looking ahead, we have a six-month pipeline of promising pursuits valued at a little over $1.2 billion, with particularly strong opportunities in commercial satellites and launch vehicles, space station logistics missions, and missile defense programs. I’ll have more to say about our near term new business outlook in a few minutes, but first I’d like to ask Garrett to take you through the company’s financial results from the first quarter and also to update our guidance for 2014 that we provided for you back in February. Garrett?

Garrett 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 in 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 first quarter of 2014 were $323 million, down $12 compared to the first quarter of 2013. Revenues were $13 million lower than expected due to the potential loss of performance incentives attributable to the Amazonas 4A geosatellite anomaly that Dave mentioned earlier in the call.

Consolidated operating income was $23 million in the first quarter of 2014, resulting in a 7.1% operating margin. Operating income decreased $8.1 million compared to the first quarter of 2013, mainly due to a $6.4 million operating income reduction attributable to the geosatellite anomaly. The company expects to recognize insurance proceeds related to the anomaly as other income in the second quarter of 2014, which should offset the first quarter P&L reduction.

I will now highlight certain factors in each of our three operating segments. Launch vehicle segments revenues were $137 million in the first quarter of 2014, an increase of $3 million compared to the first quarter of 2013. This segment’s revenues were up primarily due to a $12 million increase in interceptor revenues and a $4 million increase in space launch vehicle revenues.

Target launch vehicle revenues were down $14 million. Launch vehicle segment operating income was $11.7 million, or 8.5% of revenues, essentially flat compared to the first quarter of 2013.

Satellites and space systems segment revenues were $83 million in the first quarter of 2014, down $18 million compared to the first quarter of 2013. Geosatellite revenues were down $14 million, caused by the satellite anomaly mentioned a moment ago, and science and remote sensing satellite revenues were $6 million lower. Technical service revenues were up $3 million.

Satellites and space systems segment operating income was $3.3 million, or 4% of revenues, a reduction of $7.6 million relative to the first quarter of 2013, which was mainly due to the $6.4 million net impact of the satellite anomaly.

Advanced space programs segment revenues were $107 million in the first quarter of 2014, down $6 million compared to the first quarter of 2013, compared to lower revenues from national security satellites and the Cygnus spacecraft for the CRS contract. These revenue reductions were partially offset by higher revenues from a new commercial contract awarded in 2013.

Advanced space programs segment operating income was $8 million, or 7.5% of revenues, essentially flat with the first quarter of 2013. The first quarter of 2013 included a nonreoccuring favorable contract closeout adjustment.

Research and development expenses decreased $25 million in the first quarter of 2014, compared to the first quarter of 2013, primarily due to the completion of the COTS research and development program last year and a reduction in Antares development expenditures.

The GAAP income tax rate for the first quarter of 2014 was 36.5% compared to 35.9% in the first quarter of 2013. Our full year 2014 effective tax rate is estimated at 36.5%, while our full year 2014 cash tax rate is estimated to be about 25% to 30%, reflecting the utilization of tax credit carryforwards.

Diluted EPS for the first quarter of 2014 was $0.23 per share, compared to $0.33 per share for the first quarter of 2013. The noted satellite anomaly lowered EPS by approximately $0.06.

Free cash flow for the first quarter of 2014 was positive $87 million, driven by the collection of the CRS receivables upon successful completion of the first operational mission and continued progress on other mission milestones. Capital expenditures were $8 million in the quarter.

At the end of the quarter, our cash balance was $351 million. In addition, the company has a $300 million revolving line of credit to augment overall liquidity. The company is maintaining its full year 2014 guidance for revenues, operating income margin and diluted EPS.

As indicated in our fourth quarter 2013 earnings release in February, we expect that the operating results will be much stronger in the second half of 2014 than in the first half of the year. The company has increased free cash flow guidance by $10 million to a range of $130 million to $150 million. We expect free cash flow will increase to higher levels for 2015 and 2016.

And now back to Dave.

David Thompson

Thanks, Garrett. I’ll now update you on the company’s major operational events that took place during the first quarter and also preview what’s ahead over the next quarter or so.

Orbital conducted four major space missions and also launched one smaller research rocket in the three month period January, February, and March. The major missions included our second cargo delivery flight to the Space Station for NASA, which began with the launch of our third Antares rocket and was carried out by our second Cygnus spacecraft back in January.

The missions also included two commercial geosynchronous satellite launches, one of which took place in January for Thaicom and the other which took place in March for Hispasat. The company also delivered six new satellites and rockets in the quarter, including three orbital boost vehicle interceptors for the Missile Defense Agency and two target vehicles for the Air Force and Navy.

In the second quarter, we expect to carry out the third Antares Cygnus cargo mission to the Space Station for NASA. This is currently scheduled for launch on May 6. However, the launch could be delayed to mid-June at NASA’s request due to a potential operational conflict at the Space Station. We should know about that sometime within the next week or 10 days.

In addition, we are preparing for several missile defense launches in the month of June, including the next flight test of our orbital boost vehicle in the Missile Defense Agency’s ground-based midcourse defense program, and we anticipate delivering three satellites and six launch vehicles in the second quarter as well. If all of these events are accomplished, we will have conducted 15 space missions and delivered an equal number of satellites and launch vehicles for future uses during the first half of 2014.

I’ll now take you through first quarter new business results and discuss our outlook for additional contracts and option exercises over the next couple of quarters. New business volume totaled $495 million in the first quarter. This was made up of approximately $70 million in new contract awards and $425 million in option exercises under existing contracts.

Our launch vehicles segment led the way, with about $255 million in new business in the first quarter. It was followed by our advanced programs segment, with approximately $200 million of new business activity and our satellites and space systems segment with $40 million of new business volume.

New orders and option exercises included three space launch vehicles and two spacecraft, plus add-ons to a variety of existing programs. At the end of the quarter, firm backlog was approximately $2.3 billion, and total backlog stood at about $4.8 billion.

As I noted earlier, the company currently has proposals outstanding or in preparation that we expect to submit this quarter that totaled somewhat over $1.2 billion in potential value. Commercial satellites and launch vehicles and follow on space station cargo missions represent 70% to 75% of this total. Scientific and defense satellites and missile defense system opportunities make up most of the rest of our near term pursuits.

Before wrapping up, let me also address one other topic that’s probably on many minds given recent events in Russia and Ukraine. As I’ve noted before, Orbital has a sufficient supply of Russian built main stage rocket engines for our Antares launch vehicle already available in the United States to meet our needs for the next three years. We also have the necessary Ukrainian built first stage airframes for the next three Antares launches at our Wallops Island launch site, with two more on the way in the near term.

For future Antares launches beyond 2017, we are currently reviewing several proposals that have been submitted to the company in the last few months for two different Russian liquid engines as well as one U.S. produced main propulsion system. Today, it is too soon to say which option will be the best one for us, although at present it appears that the newer options may be preferable to continuing with our current engines.

Within the next three to four months, we expect to make a final decision and enter into a contract for a block buy of main propulsion systems to cover our needs for the 2017 through 2020 period, and I’ll have more to say about this by the time we talk in the summer.

In summary, then, Orbital is off to a good start in 2014. The third launch of Antares and the second flight of Cygnus early in the year were flawless, reflecting the increasing maturity of these important new products to the company. Adjusting for the charges associated with the in-orbit satellite anomaly, we are ahead of plan on revenue and earnings so far in 2014, and the company also began the year with record quarterly cash flow, a strong early indicator of what’s ahead as our financial resources increase substantially over the next few years.

Thanks for your attention. We’re now ready to open up the call for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And your first question comes from the line of Patrick McCarthy from FBR Capital Markets.

Patrick McCarthy - FBR Capital Markets

My first question is on the Ukraine situation. I was wondering if you could maybe put some parameters around what now looks like three options from a spend perspective. And it sounds like you’re maybe looking at solid engines, and is that materially different than continuing with the liquid guys?

David Thompson

Well, without getting into too much detail because of the competitive process that we’re running on these different propulsion alternatives, I can say that the two new alternatives both have some good advantages in areas such as payload performance and even in referring production costs compared to our original approach. There is some additional product R&D that would be required over the next couple of years if we switch over to one of those new approaches, but it’s fairly modest. Certainly nothing of the magnitude of the original development costs, and I think it would be fairly easily accommodated within our normal level of R&D spending spread out over a couple of years.

We’ve made a good deal of progress in evaluating these options, although we still, I think, are at least month or two away from making a final selection. But I’m pretty optimistic that we have a good menu of choices and that the process is going to produce a very strong, very competitive outcome for us when it runs its course here by midyear.

Patrick McCarthy - FBR Capital Markets

I’m assuming that it doesn’t, but does the engine situation today have any impact on how you think about the margin rate adjustments in the back half of this year? Or are they just two separate issues at this point?

David Thompson

They’re separate issues. I see no impact there at all.

Garrett Pierce

I agree. It will not have any impact on that.

Patrick McCarthy - FBR Capital Markets

And then just one final one, could you update us on what you’re thoughts are related to capital allocation from here?

David Thompson

At least in general. As you know, and as we’ve said in the past, our range of alternatives for deploying excess cash include stock repurchases, potential new product R&D or M&A activity, and dividends. In the past, when we’ve decided that the time was right to act, I think the company has moved pretty aggressively in these areas, and I think we will do that again.

We’re certainly not anticipating that two or three years from now we’re going to be sitting on three-quarters of a billion dollars in cash. I think we’ll make some fairly near-term decisions as to how to begin deploying that cash to both short term financial advantage and long term strategic developments. But I can’t today really be a lot more precise, but we’re certainly working on it hard.

Operator

Your next question comes from the line of Chris Quilty from Raymond James.

Chris Quilty - Raymond James

Just want to follow up on the Amazonas issue. Can you remind us, back years ago when you had the Galaxy 15, I think you did recover the entire insurance proceeds you were seeking, but ended up footing the bill for engineering costs that totaled, was it around $500 million, to carry out the accident investigation, and that’s what the actual financial hit turned out to be?

David Thompson

Good memory. Maybe yours is better than mine there. Yeah, back four, four and a half years ago, when we had that anomaly on the Galaxy 12 satellite, I think that was about right. This one’s a bit different. I don’t expect that we’ll have any material cost associated with the engineering investigation. We are part of the way through it now, working very closely with Hispasat, our customer, and the satellite’s owner.

We have not gotten all the way to the end of that process, but we have gone far enough that I think we have a pretty good idea of, I wouldn’t say the only causes that could have triggered the anomaly, but certainly the two most likely causes. Both of these are isolated. We would not expect to see these occurring on any other in-orbit satellites, or for that matter ones that are going through the factory today. So I think it’s pretty isolated, and I believe we will have largely completed the diagnostic work here within a handful of weeks. So I don’t think we’ll have a replay of the situation from four of five years ago.

Chris Quilty - Raymond James

Can you give us your update both on the number of satellite orders that you’ve received year to date and your outlook on the market and market share?

David Thompson

Sure. The year to date order rate for commercial communications satellites has been slow. The year’s been off to pretty much of a slow start. There have been three announced contracts, all of those for medium to high power satellites, not really addressable by us today, even with our new GEOStar-3 product line.

Our outlook for the full year continues to be fairly similar to last year, both in total number of satellites as well as in their distribution by power levels. Last year there were 23 orders, there were four in our traditional small category, I think there were probably another five or six in what is now the expanded addressable market for us with the GEOStar-3 being added to our lineup. But so far this year, only three orders.

We’re in contention now for several contracts, one of which I think is very likely to be awarded to us in the near term, a couple of more decisions expected later in the second quarter. So hopefully by midyear we’ll be well on our way to our target of three wins with an upside of four. That continues to be the outlook and really is the same one we started the year with. The big difference, I think, is just a few of the decisions that were expected in March and April have moved to April, May, or June.

Chris Quilty - Raymond James

And circling back to the Antares engine, can you elaborate on whether you might be required by the customer or the supplier to fund any R&D associated with engine developmental? Or is that something that the supplier would foot the bill for and it would be baked into the product cost in the long term?

David Thompson

It would follow the latter model. We’ve specified in our discussions with all three potential propulsion system suppliers that Orbital is not planning to fund their engine research and development or capital expenditures. We would expect that to be handled by the supplier and recouped over time, not all over the initial block buy of four years’ worth, but over a longer period. And the proposals received to date reflect that approach.

Chris Quilty - Raymond James

And obviously we’re looking at different engines and different engineering challenges, but how should we try to quantify Orbital’s engineering costs for redesigning the Antares with a new engine? And secondarily, what type of certification process might you need to go through with NASA to continue CRS missions beyond those currently awarded?

David Thompson

Those are good questions. The answer to both the first and second question varies a bit based on the final choice of the propulsion system. I would say in general, the engineering cost or other modification cost that we would expect to incur would be bracketed from kind of zero at the low end, if we continue with our current engine, to a few tens of millions of dollars, maybe $30 million or so at the high end, if we were to switch.

With respect to certification of the system, that also would vary a bit based on the degree to which the new propulsion system would differ from what we’ve done in the past. Right now we don’t think the degree of departure would be sufficiently great that in view of other means of building confidence in any revised configuration we might select that a test flight would be required, but that is one of the factors that we must consider in the decision as to the best propulsion choice.

And that’s one of the reasons that the process has taken a little longer. I think ultimately we’ll come out with a better answer for our long term use than had we made a quicker decision, but I think we’re still, as we mentioned earlier, a couple of months away from a final decision.

Chris Quilty - Raymond James

And are you proceeding with discussions on potential commercial Antares launch contracts, or are those basically on hold until you resolve the engine issue?

David Thompson

We’re continuing on several non-NASA opportunities, commercial and defense. The schedule for those launches is sufficiently near term that in general, our existing engine approach would be carried over for those. Those are basically 2016 or 2017 launch dates, so we would not anticipate, at this point, for things that are that close in, implementing any changes.

Chris Quilty - Raymond James

And the contract that you won from Skybox for the Minotaur-C, can you talk about that?

David Thompson

Our smaller launch vehicles, the Minotaur-C, which is a minor modification to a configuration we’ve used before, plus a new Pegasus order from the first quarter, likely to be followed by several other small class orders in the second part of the year. The commercial contract with Skybox is to launch six of their small commercial imaging satellites on a single Minotaur-C. That launch is scheduled at the end of next year, fourth quarter of 2015, from Vandenberg Air Force Base, an place that we’ve operated from in the past. We have some other discussions underway with Skybox for additional launches after that, but that first contract will place six of their satellites in orbit a little over a year and a half from now.

Chris Quilty - Raymond James

And do you know how you competed for that particular contract in terms of when you look at the competition of the Soyuz and whatnot? Was it based upon price or timing and availability?

David Thompson

I think both of those were very important factors. It was critical to Skybox’s business plan that their launch supplier for their first full group of satellite deployments be able to launch by the end of next year, which we’re able to do. And as in most government and commercial launch competitions, price was certainly a significant factor as well.

In addition, the track record that the Minotaur family has amassed over the past dozen or so years, a perfect 25 successes in 25 launches, also, I’m sure, played a role in the decision.

Operator

Your next question comes from the line of Tyler Hojo from Sidoti & Company.

Tyler Hojo - Sidoti & Company

Just firstly, I know that the revenue guidance isn’t changing for ’14, but are there any swings in terms of how you see the segments playing out in 2014?

David Thompson

No, things are pretty stable. Just to recap the segment outlook, the launch vehicle segment still looks like its full year revenue will be very much in the same range as last year, plus or minus a percent, I would say. It will be right around $50 million. The satellite space systems segment is expected to generate a lot of growth this year, and should be up high 20% to 30% compared to last year. And the advanced space program segment will be down a little bit this year compared to last year, but the ranges are pretty stable.

And the same thing is true with regard to operating margins. There may be a few tens of basis point up or down adjustments, satellites may be down a little bit, advanced programs up a little bit, compared to where we are at the beginning of the year, but the net effect of that is still somewhere in the range of 7.5% plus or minus 0.25%.

Tyler Hojo - Sidoti & Company

And I think I missed it, but in the prepared remarks, I think you guys called out a contract closeout benefitting the satellite segment. Could you call out what that was?

Garrett Pierce

There were a number of satellites that have been successfully delivered and launched that we had some reserves that were closed out. It’s a number of satellites that added up to a significant impact in the quarter, because if you reverse out the charge we took, we come out with about 10% operating income for the business unit. But Thaicom-6 is one that comes to mind, SES-8 comes to mind, all successful programs. We were conservative and were able to reverse those reserves, because it was appropriate.

David Thompson

I would just add on that, as we said back during our February call, we do not expect for the full year that operating margins in the commercial satellite business will be as strong as they were, say last year. And although we did, as Garrett pointed out, have some contract completions that have beneficial effects on the first quarter, we don’t expect to see that repeated in the next couple of quarters. Our next planned closeout is not until fourth quarter.

Tyler Hojo - Sidoti & Company

And then just a point of clarification. I’m just curious, in regard to this Hispasat satellite, what is it that’s kind of a one-off about this that gives you the confidence that it’s not going to be a recurring issue for the products that are moving through your manufacturing facility right now?

David Thompson

As I mentioned earlier, we’re focused on two of the highly likely causes of the failure. One of those - although I don’t want to get into too much detail here - had to do with something that was specific to the Amazonas 4A satellite that is not done on any prior or any current satellite in production.

The other potential failure mode is focused on a component that we have used many times in the past. Fifty of these have been used by us over the last 10 or 12 years, and I’m sure by other satellite manufacturers as well.

And on this, it probably comes down to a combination of unit to unit variability compounded by certain peculiar aspects of this particular satellite. We had, for other reasons, moved away from the use of that device. This was the last program to actually use it. And so for future satellites, we have a different design on that particular component.

So for those reasons, we don’t anticipate this problem being systematic in any way, having any effect on certainly any other deployed satellites that are well beyond the checkout period. This isn’t a latent problem that might arise from a satellite already in orbit. And given the other characteristics of the likely causes of the problem, it’s not one we would expect to encounter on any satellites currently in design or production.

Tyler Hojo - Sidoti & Company

And just maybe one last follow up. I believe when you got the order from Hispasat that they actually had an option for a second order. Can you maybe update us in terms of how you view the potential for that actually coming through now?

David Thompson

We’re working with Hispasat on that now. I think they continue to have a need for that extra capacity, so we’ll have to wait and see. But as I mentioned, the likely cause of this problem is such that it should not put a cloud over their decision on moving forward with that option.

Operator

Your next question comes from the line of Greg Konrad from Jefferies.

Greg Konrad - Jefferies

I was hoping you could talk a little bit about targets. It seems like that group has been down the last couple of quarters. Are you seeing any other opportunities out there, or have pressures created some of the opportunities to go away?

David Thompson

Well, you’re right, the revenue in the targets line has been down over the last couple of quarters compared to their results in 2012 and 2013. I put it in perspective, though, by, if you look back a few earlier years, targets have grown pretty dramatically since 2009 or 2010. So we’re probably at a short term plateau there.

The funding outlook for targets at the aggregate level is okay. In the Missile Defense Agency’s budget request for fiscal year 2015 that was submitted to Congress early last month, the total funding level is actually up a little bit, 5% or so, compared to the amount that was appropriated in 2014.

Our outlook is for revenue in the target area to be down this year, but more than offset by some growth in the interceptor area. And with the potential for an upturn in targets work next year and the year beyond, as we expand both our value added in the broader targets and testing field, and also the range of our targets from short and midrange to intermediate range and eventually ICBM class targets.

The big development work that we’ve been doing over the last couple of years has focused on intermediate range targets. The first several of those will be delivered this year. In fact, I think we have four that are planned for delivery over the next three quarters, with the first flight of this new generation of intermediate range targets taking place right at the end of the year. We have some important tests coming up this quarter, and if those go well, then the first flight should take place late this year.

At present, we have 16 IRBM class targets under contract and we’re anticipating maybe another half dozen units being ordered second half of the year. So I think we’ll see pretty steady work at that level, and we’re also anticipating some opportunities to expand our level of participation and our value added more broadly in the targets and testing programs within the Missile Defense Agency.

Greg Konrad - Jefferies

And if I look at R&D for the quarter, and just kind of think about that on an annual basis, it seems to be a little bit below where I would expect. Can you maybe talk about just your R&D plan for the rest of the year?

David Thompson

The full year plan is still very much in alignment with what we talked about at the beginning of the year. We’re anticipating full year R&D spending to be in the range of $40 million to $45 million. Now, that’s down quite a bit compared to last year, largely due to the completion of the Antares development program and the COTS shared R&D project with NASA that Garrett referred to.

Within that $40 million to $45 million, we expect to, for the full year, spend about $25 million on the commercial satellite upgrade. Most of the spending in the first quarter was focused on that. We are, at present, about 80% complete, but we still have another $15 million or $20 million to go in the last nine months of the year. We also have some other smaller projects, but overall, for the full year, we’re still targeting between $40 million and $45 million in R&D spending.

Operator

And your next question comes from the line of Kevin [Jevatoni] from Keybanc Capital.

Kevin [Jevatoni] - Keybanc Capital

Is the expectation that you guys would be able to receive that full $6.4 million that came off the operating income this quarter, if it does happen in the second quarter? Or is there the potential that it could come in less than that on the other income line?

Garrett Pierce

We do anticipate that it will be recognized in the second quarter. I do not anticipate that it will be less than the amount. It’s a conservative estimate at this point, and our engineers are still working on the program to see if this can be resolved. But I would answer your question very directly that it should be equal to that, possibly more.

Kevin [Jevatoni] - Keybanc Capital

And then any color on whether or not you’re seeing any kind of additional traction on the GEOStar-3 now that you’ve put the formal announcement out there that it’s available? Maybe talk about that a bit?

David Thompson

With our current pursuits in the commercial satellite area, at present I think we have four proposals that are outstanding for decisions expected this quarter. And depending on exactly how the customers decide to implement their programs, at least two of those, potentially three of those, involve GEOStar-3.

Kevin [Jevatoni] - Keybanc Capital

Any color you can give on where you think the CRS2 RFI comes out and how you guys look at it? Was it kind of what you expected it to be? And then maybe also any comments you have on the short term extensions issued by NASA for yourselves and Space X?

David Thompson

Good question. Let me maybe take the extension first, and then the follow on CRS2 contract second. NASA recently announced that it was planning to extend the period of performance of the two existing CRS contracts, one of which we have, by one or two years, and to potentially add additional missions to both of those contracts.

While I understand that the Space Agency’s plans are still not final, we believe it’s reasonably likely that NASA will add two to four additional cargo missions under our current contract. So instead of doing eight operational missions, it could be expanded to 10 or 12. And those missions would bridge the gap in 2017 and 2018 until a new longer term, what I’ll call for the time being CRS2 contract, could be put in place.

With respect to the timing of that CRS2 contract, I think it’s also not completely clear exactly what pace things will proceed there, but if I had to guess, I would say that the CRS2 contract would be awarded sometime the early part of next year, leading to initial missions under that contract sometime probably in the second half of 2018 and continuing through the current expected operational lifetime of the Space Station, which is through 2024.

So I think we’re getting a little better clarity on that whole situation than we had a few months ago, and we should have even more by midyear.

Operator

And your final question comes from Gary Liebowitz from Wells Fargo.

Gary Liebowitz - Wells Fargo

Just a couple of cleanup questions. One is in the cash flow there was $10 million from property sales. What was that, and had that been included in your guidance before?

Garrett Pierce

It wasn’t included in our guidance. That had to do with the construction and outfitting of the Wallops Island space launch facility, and we were able to negotiate a settlement for some funds that we had advanced. And that was picked up in this first quarter, in addition to.

Gary Liebowitz - Wells Fargo

And then my other question was, your total backlog was down about 7% from the end of 2013. Were there some options that were taken out of the backlog, or IDIQ contracts not expected to come in as they were before? What would explain that sort of drop in the total backlog?

David Thompson

Good question. I think there were a few relatively small contracts that had expiring options, but I think in addition to that, you’re just seeing some of the inherent lumpiness of the larger contracts, when in a particular quarter, a big one is awarded, things really pop up, and then you go a quarter or two without a major new award and they move down.

We’ve seen that certainly over the last three or four years, these $500 million class new awards. Back in 2011, we had a couple of those, one in the IRBM targets area, another in the satellite area. In 2012, we had it with the next phase of the GMD Interceptor, and the onramp of a couple of our launch vehicles to a big NASA space launch contract. Same thing with a particular program last year. And we just haven’t had one of those in the last couple of quarters. So I think that’s also been a factor.

I think we’ll bring the discussion to a close at this point. I want to thank you all for joining us this morning, and I look forward to your participation next Tuesday when the company will have our annual shareholders meeting, which will also be webcast to those not able to participate in person.

Thank you again, and have a good day.

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