Orbital Sciences Q3 2007 Earnings Call Transcript

| About: Orbital ATK, (OA)

Orbital Sciences Corp. (ORB) Q3 2007 Earnings Call October 18, 2007 9:00 AM ET


Dave Thompson - Chairman and CEO

Garrett Pierce - Vice Chairmanand CFO

J.R. Thompson - Vice Chairman,President, and COO


Troy Lahr - Stifel Nicolaus

Howard Rubel - Jefferies & Co

Gary Liebowitz - WachoviaSecurities

Kevin Grasmick - FBR

Chris Donaghey - SunTrustRobinson Humphrey

Michael French - Morgan Joseph

Steve Mather - SMH Capital

Tyler Hojo - Sidoti & Company


Good morning. My name is Janice,and I will be your conference operator today. At this time, I would like towelcome everyone to the Third Quarter 2007 Financial Results Conference Call.

All lines have been placed onmute to prevent any background noise. After the speaker's remarks, there willbe a question-and-answer session. (Operator Instructions). Thank you. Mr.Thompson, you may begin your conference.

Dave Thompson

Thanks Janice. Good morningeveryone, thank you for joining us for Orbital's third quarter 2007 financialresults discussion. I am Dave Thompson, and with me on the phone today are J.R.Thompson and Garrett Pierce.

Before we get underway, I wouldlike to ask everyone to take special note of the Safe Harborparagraph that appears at the end of the company's earnings release. Thisparagraph underscores the major types of uncertainties and risks in theforward-looking statements that we'll make this morning.

Please keep it mind as we discussour future financial, operational and new business plans and our guidanceduring today's call.

We'll follow our customaryoutline for the call this morning. I'll begin by discussing some highlightsfrom the third quarter, and then turn it over to Garrett, who will cover thecompany's financial results in greater detail, and update our guidance for thisyear, and provide a preliminary look at next year as well.

After that, J.R. will recaprecent space missions and major systems deliveries that took place in the thirdquarter, and he'll also provide a preview of upcoming launches, productdeliveries and other significant operational events for the remainder of theyear.

And then finally, I'll addressrecent new orders and contract backlog, as well as our new business outlook forthe fourth quarter of this year, and then we'll open up the call for yourquestions.

Orbital had another, veryproductive quarter in the July to September period. I'll highlight three areasin which the company's third quarter results were particularly noteworthy, andthen Garrett, J.R., and I will come back and cover each of these in more depthlater in the discussion.

So let's start with our financialresults. Orbital's financial performances in the third quarter set new recordsfor revenue and profit for the company. Our revenue increased by a strongerthan expected 46% to about $289 million.

Our operating income rose 54% to$23.2 million. Our net income 84% to $15.7 million, and our earnings per sharejumped 86% to $0.26 per share. All of these being compared to the third quarterof last year.

All of the company's businesssegments contributed to our revenue and profit growth, with especiallyimpressive results from our communication satellite product lines, our HumanSpace systems contracts, and our Missile Defense Programs.

Free cash flow was $22.4 millionin the quarter, and we used $15 million of cash to repurchase of the company'sstock in the month of August and September. As Garrett will describe in fewminutes, we are again increasing our financial guidance for 2007, and areproviding for the first time our preliminary look at 2008.

Compared to our previous targetsthat we last updated for you in July, the company has increased this year'srevenue range by $50 million plus. We've boosted our free cash flow estimatesby $5 million, and enhanced our EPS targets by approximately $0.5 per share inour revised 2007 guidance.

Next comes our operationalhighlights. In the last three months, the company carried out four major spacemissions, and also completed and delivered another six space-related systemsfor future uses.

In addition, in the early part ofOctober, we launched, and are now well along with the in-orbit check-out of newcommunications satellites. These recent satellite deployments and rocketlaunches boosted the company's record to 78 consecutive successful spacemissions that we carried out over the last six year. These missions consists of54 rocket launches and 24 satellite and related space systems deployments.

In the final quarter of the year,we plan to conduct up to seven additional satellite deployments and rocketlaunches, and also to deliver another nine or 10 space systems, and launchvehicles for future uses. J.R. will discuss recent missions and previewupcoming operations in a few minutes and later on in today's call.

Finally, there's our new businessactivity. The company maintained a strong new order momentum that we built upin the first half of the year, with about $455 million in new contract awards,and existing option exercises taking place in the third quarter.

This new business activityreflected orders for two new satellites, and 21 new launch vehicles, plus[substantial] add-ons to several existing contracts.

We currently have outstandingproposals and other active near term pursuits, with a potential value of over$450 million. So we remain optimistic about the company's chances foradditional bookings before the year is over.

I will review our new orders andour market outlooks in more detail later in the call.

Now, however, I'd like to askGarrett to take us through the company's financial results from the thirdquarter and the first nine months of the year, and also to discuss our revivedguidance for 2007 and our preliminary outlook for 2008. Garrett?

Garrett Pierce

Thank you, Dave. Good morning. AsDave indicated, Orbital had a record breaking quarter. The bottom-line resultsfor the quarter were driven by profitable revenue growth, and continued controlover the level of spending on general and administrative expenses.

During this call, we will providecertain non-GAAP financial measures. A reconciliation of these measures tocomparable GAAP Financial measures can be found in our earnings release, or tothe extent not addressed there, but discussed in this call, will be availableas an appendix to the transcript of this call, and will be posted under theInvestor Relations heading on our website.

Consolidated revenues for thequarter increased by $92 million or 46% over the prior year, reflecting solidincreases in all of our reporting segment. The significant increase was in theSatellites and Space Systems segment, which increased $58 million or 49%,driven by the Orion Human Space program in the GEO product line.

Launch Vehicles segment revenuesincreased by $29 million or 41%, primarily driven by the sub-orbital target ininterceptor product lines. Revenue for Transportation Management System was up$4.4 million or 46%.

Operating income for the thirdquarter of 2007 was up by $8.1 million or 54%, in line with the growth inrevenues quarter-over-quarter. Overall, the third quarter operating margin wasup 40 basis points from 7.6% a year ago to 8% in the third quarter of 2007.

In our Satellites segment, theoperating margin through the GEO product line was up substantially, as weexecuted our new orders driving the margin over the segment from 6% last yearto 6.5% in this year's third quarter.

While the GEO product line marginhas improved year-over-year, significant potentials exists to further improvedmargins as we execute our substantial GEO satellite backlog.

In our Launch Vehicles segment,the operating margin decreased slightly from 10.7% last year to 10.5% in thisyear’s third quarter. This net decrease in margin was driven by reduced marginin our space launch vehicles product line, due to cost growth on certainprograms, partly offset by increased margins in our interceptor and targetproduct lines.

The operating margin in ourTransportation Management Systems segment was significantly higher than thethird quarter of last year; specifically 6.5% last year versus 9.6% this year.This is primarily the result of higher product sales on follow-on parts insystem components which had higher margins.

I have more to say about theoperating margins for the year in a moment. Selling, general and administrativeexpenses for the quarter were essentially flat compare to the third quarter of2006. However, as a percentage of sales, SG&A actually declined 320 basispoints from 10.2% to 7%.

Research and Development expensesfor the quarter increased from $2.6 million in 2006 to $4.3 million in 2007,driven by higher expenditure levels in most of our business segments.

Net interest income increased by$2.45 million due to the reduction in interest rate on our long-term debt of 9%to less than 2.5%, and increased returns on higher average invested cashbalances.

Net income increased by $7.1million, an 84% improvement over the third quarter of 2006. Approximately 75%of this improvement is due to revenue and operating income growth, and thebalance is attributable to improved net interest income related to the companysignificantly improved capital structure.

During the third quarter, we puta new and improved five-year term revolving credit facility in place with lowerinterest cost, and expanded borrowing capacity. The new facility, whichreplaced the existing $50 million facility, provides a basic commitment of $100million and subject to certain conditions up to an additional $75 million to$175 million in commitment.

Recently both S&P and Moody'supgraded our credit rating to BB+ and Ba1 respectively, which is one notchbelow investment parade. During the quarter, Orbital purchased approximately712,000 shares of its common stock, at a total cost of $15 million, an averageprice of $21.06 per share.

These purchases were authorizedas part of the Board of Directors $50 million stock buyback program improved inApril of this year. Since April, we have spent $25 million of the $50 millionauthorization to buy our common stock.

To recap our stock buybackprogram; since inception in 2004, we have spent approximately $133 million topurchase 8.7 million common shares at an average price of $15.24 per share.Diluted EPS was $0.26 for the quarter of 2007, compared to $0.14 for 2006; anincrease of 86%.

There were 60.9 million weightedaverage diluted shares in the third quarter of 2007, as compared to 62.9million in the third quarter of 2006; a reduction of 2 million weighted sharesreflecting our stock buyback program during this period.

Free cash flow for the thirdquarter was $22.4 million, including $4.5 million of capital expenditures, andour cash balance and marketable security at the end of the quarter totaled $238million.

We are updating our full year2007 financial guidance, and increasing revenue estimate to be $1.50 billion.This $50 million increase over the previous high-end guidance is drivenprimarily by the Orion and GEO programs.

We are increasing our full yeardiluted EPS to a range of $0.89 to $0.91, and increasing free cash flow to arange of $65 million to $70 million. We expect operating margin approximately8% for the year.

This operating margin is lowerthan our previous guidance due to the ramp up of revenue on the Orion program, aswell as increased revenues in our GEO product lines. Both of which currentlyhave lower than average margins.

We have not completed our reviewand approval process of our 2008 plan. However, on a preliminary basisexcluding the Taurus II program, we are targeting revenues for 2008 to be inthe range of $1.75 billion to $1.1 billion, operating income in the range of8.25% to 8.5%; with diluted EPS in the range $0.93 to $0.98 per share.

Free cash flow was targeted to bein a range of $75 million to $80 million, including capital expenditures of $20million to $25 million. As Dave outlined, the Taurus II vehicle couldsignificantly broaden our launch system portfolio.

The Taurus II product line couldincrease 2008 revenues by $25 million, lower EPS in 2008 by approximately $0.12to $0.16 per share, and require $40 million to $45 million in cash for researchand development, capital expenditures, and routine working capitalrequirements.

But again, I want to emphasizethat these 2008 targets are preliminary. We will update our 2008 guidance earlynext year in connection with our fourth quarter 2007 earnings call. Now back toDave.

Dave Thompson

Okay. Thanks Garrett. I'd like tonext ask could J.R. to update you on the company's major operational eventsfrom the third quarter, and also to preview what's ahead for us for the rest ofthe year. J.R.

J.R. Thompson

Thanks Dave, and good morning.Operational results from the third quarter were equally impressive, withseveral successful high profile missions taking place. The Dawn spacecraftbegan its 8 year, 3 billion mile trajectory to intercept and study two largeasteroids and is operating normally, with all appendages deployed, and thepropulsion system activated.

The Missile Defense Agency testfired the Orbital build, OBV Interceptor from a silo at Vandenberg Air ForceBase, and successfully engaged a target launch from Kodiak, Alaska.This was the sixth consecutive successful Orbital build vehicle flown in theGMD program, and the 30th consecutive successful flight of this three-stage vehicle,including its Pegasus heritage.

Other successful, high profilemissions are the recently launched Optus D2 and Intelsat-11 GEO communicationssatellite, which are being activated and functioning normally in geostationaryorbit. Delivery of both satellites to the customers is expected by the end ofthe month.

And Minotaur II target was alsosuccessfully launched for the air force in August. The exception to thesehighly successful missions was a short range air launch target's failure toseparate the payload from the booster, resulting in some lost test opportunityfor THAAD radars.

Major system deliveries occurringduring the quarter included the GEO satellite Optus D2 and Intelsat-11, twoORBCOMM payloads, a Minotaur II target, and two GMD interceptors. Theinterceptor deliveries allowed Boeing to complete a major MDA milestone ofinstalling 24 operational systems in silos at Fort Greeley, Alaskaand Vandenberg Air Force Base by the end of 2007 government fiscal year.

Our Transportations ManagementSystem Group also successfully completed significant contracts at Olympia, Washington and Singapore. Withthe Missile Defense Agency planning to deploy interceptors in Europe,a major focus of the Launch Systems Group has been development of a two-stagevariant of the configuration just successfully launched.

Funding is firm for thisdevelopment through the end of 2008. An order for two flight tests, plus 10deployed two-stage interceptors is expected by mid-next year.

In addition, we recently receivedfunding for a long league of materials, for seven additional 3-stageinterceptors, with full turn-on expected by the end of November.

The KEI program is moving aheadand targeting the initial flight test, approximately one year from now. TheNavy ordered 13 additional Supersonic Sea-Skimming Targets, plus logisticsupport and ordered spares. Several attempted Navy target launches weredeferred out of the quarter due to range and fleet asset issues.

The Advanced Programs Groupcompleted several major review milestones with Lockheed and NASA, and ispointing toward an early test of the Launch Abort Systems of NASA's Orionspacecrafts in approximately one year from now.

With the work on Orion not yet atthe peak, seeing growing opportunities in classified program areas, andincreasing commitment to the Taurus II development, this operating group isfast becoming an area of high growth for the company.

The major focus of the SpaceSystems Group has been directed towards streamlining our production operationsof the GEO Communication spacecraft product line to capitalize on volume andthroughput, and efficiencies to improve margins.

Nine GEO satellites are in somestage of processing, and projected to remain robust through 2008. Two more GEOsare projected to be delivered, and launched before the end of the year;Horizons-2 and THOR IIR. We expect 2008 to be another good year for this sectorof our business.

The Transportation ManagementSystems Group continues to improve its operations, profit margins, and newbusiness wins. Two contracts were completed this quarter, and two forecastedfor completion in the fourth quarter. $46 million worth of new orders have beenreceived year-to-date, with 76% capture of competed awards.

Increasing our staffing remains ahigh priority at all our locations. During the quarter we added a 150 newemployees, bringing year-to-date additions to over 500, and are currentlylooking to add another 250.

To accommodate this increase instepping, we have added office space in Virginia,with planned additions in Arizonarelated to this fall. The company is preparing plans for further expansion ofour facilities in late 2008 and 2009

Looking ahead of the operationalevents in the fourth quarter, we anticipate launching a Medium Range Target incombined operations with the Japanese Navy, six Supersonic Sea-Skimming Targetsin three separate operational exercises with the US Navy, and two GEOCommunications commercial satellite.

System deliveries to customersinclude three Interceptors to Boeing, one for the next flight test scheduled inthe spring of 2008, four Targets to the Navy, two GEO Communications Satellitesto launch sites, four ORBCOMM payloads, and complete two contracts for TransportationManagement Systems customers.

Going into 2008; we see acontinued fast pace on system deliveries and planned missions, with Interceptorboth OBV and KEI, GEO Communication Satellites and the Orion Launch AbortSystem being the high profile activity. And with that I'll return thediscussion to Dave.

Dave Thompson

Thank you J.R. I'll now give youa report on our third quarter new business activity, and the resulting contractbacklog figures. And I will also comment on our overall market outlook for thereminder of 2007 and the early part of 2008, and finally, I'll address tostatus of our Taurus II Medium Launch Vehicle initiative.

Orbital booked approximately $200million in new firm orders, and $220 million in new option orders in theSeptember quarter. The company also received approximately $35 million andoption exercises under existing contracts in the last three months.

Our new business activity waswell distributed across all three of our business segments. Satellite andAdvanced Systems accounted for $240 million of the $455 million quarterlytotal, this was followed by Launch Systems, which contributed about a $190million, and our TMS products which added the final $25 million in newbookings.

Notable third quarter new ordersincluded as J.R. mentioned as add-on to our Orbital Boost Vehicle missileinterceptor contract with Boeing for seven new rockets, which are planed for2009 and 2010 deliveries, a new order for 13 Coyote Supersonic Sea-SkimmingTarget missiles from the U.S. Navy for 2009 missions, and an option exercisefor another Minotaur IV space launch vehicle by the United States Air Force fora 2009 launch.

Additional new business was alsobooked in the form of two new satellite orders from U.S government customer;one of these coming from NASA and other from a military customer. And inaddition, we added to our Orion human space vehicle contract with Lockheed andNASA during the third quarter.

Year-to-date, new businessactivity for the company has totaled about $1.75 billion, this consists ofabout $1.51 billion in new orders and $240 million in option exercises underpreviously awarded contracts.

Satellites and Advanced Systemscontributed $1.22 billion of that total so far this year. Launch vehicles added$460 million, and our TMS products rounded out the total with slightly over $70million in new bookings so far this year.

Reflecting the third quarter'scontinued strong new business results, the company's firm contract backlog asof September 30, increased 6% to $1.96 billion, and our total contract backlogsrose 16% to $4.06 billion, both compared to the levels of one year ago.

Launch vehicles accounted forapproximately 52% of our total backlog or some $2.09 billion, Satellites andAdvanced Systems contributed 46% of total backlog or $1.88 billion, and TMSproducts added the final 2% or roughly $95 million of total backlog.

At the end of this year's thirdquarter, Orbital had 100 % of our projected 2007 revenue in backlog. We alsohave 85% of our projected 2008 revenue and about 55% of our 2009 revenue incontract backlog as of September 30.

Looking ahead to the fourthquarter and the early months of next year, Orbital currently has over $300million worth of new business proposals outstanding and under review by customers,and we expected to submit another $200 million worth of additional proposalsbefore the year is over.

Well not all of these proposalswill result in booking this year. The company does expect continued good newbusiness volume over the next several months. Assuming this occurs then for2007 as a whole, our new orders and option exercises should reach $2 billion,which would be a new record for us if achieved.

Finally, as I highlighted in oursecond quarter conferences call, Orbital has embarked on the first phase of athree phase development program for a new medium-class space launch vehiclesthat we are calling Taurus II.

Since starting Phase 1 of thisproject in April, we have ramped up our design and engineering teams for thenew rocket and our proceeding towards the first of the two remaining go/no-godecision points. This one centered around the vehicles' pulmonary design andproduction review that will take quite in December.

So far the rocket's predictedperformances and economics look good, and it is been favorably received bypotential customers that we are briefing on this new product.

As Garrett indicated if we do agreen light to the vehicle's development at the end of this year, and if italso passes its final check point that would come up late next summer, then wewould expect Taurus II to require $40 million to $45 million in cash investmentin 2008, and to reduce our reported EPS next year by the $0.12 and $0.16 asGarrett also mentioned.

To give you a little broaderperspective on the outlook for Taurus II over the three year development periodthat began in early 2007, and which would culminate in the vehicles firstlaunch in the strand of 2010. Our expected total expenditures on Taurus IIcounting research and development, capital equipment and inventory and otherworking capital would be expected to total between $110 million and $130million.

Fortunately we believe that muchof this will be offset by early launch contract payments and by other customerand supplier contributions during the development program.

We also believe the marketopportunity for Taurus II is a very attractive one for us, and that growingthis new launch vehicle into a $150 million and $200 million annual productline with superior operating margins, and favorable cash flow characteristic isquite feasible over the next four years, as long as the program continues tomeet its commitments.

At the same time, theavailability of a reliable and affordable medium-class launch vehicle isexpected to stimulate additional growth in the small-to-medium satellitemarket, which could provide good opportunities for us to expand our governmentand commercial satellite manufacturing businesses as well, once this vehicle isonline some years from now.

To wrap up, Orbital's 2007 thirdquarter as well as the first nine months of the year have been very strong froma financial standpoint, and this has been further reinforced by impressiveoperational achievement and record-setting new business results thus far duringthe year.

We expect to finish 2007 with arobust fourth quarter, and to maintain the company's strategic and financialmomentum into 2008. I appreciate your attention; I think we are now ready toopen up the call for your questions.

Question-and-Answer Session


Thank you, sir. (OperatorInstructions). Your first question comes from the line of Troy Lahr with StifelNicolaus

Troy Lahr - Stifel Nicolaus

Thanks for taking my question. Iam wondering if you guys could address the margins a little bit at SatelliteSpace Systems. I think last October, Dave, you said that Orion margins werekind of going to start at around 8% to 10% and then you'd like to approach 12%.I guess it seems like we are not getting there.

And then you've talked about theGEO business actually booking work at around 8% to 10%. Is there a certain timewhen we should start seeing that translate through into the segments, or Iguess I'm just kind of curious on when that's going to start impacting thenumber?

David Thompson

Yes, sure Troy. Let me take a pass at that and thenGarrett may want to add some more to it. Let me take it in reverse order, andtalk about the GEO Communication Satellites first and then the Orion programsecond.

We've seen very good improvementsin the profit margins on the commercial GEO Satellites over the past year. Inthe third quarter a year ago, margins in that product line were approximately3%. This quarter they are or were approximately 7%.

So, we’ve come a good waylargely, because this time last year we were still carrying a little bit of ourresearch and development on the high powered, what we call the STAR 2.4configuration that has since gone on to be very popular with customers. We alsohad the final effects of one of our early contracts that was a loss in thatbusiness.

So those things have washedthrough the system, and the new contracts that have driven revenue growth thisyear have generally speaking been more profitable.

But we’re not finished there andI think over the course of the next 12 to 18 months, we‘re aiming to addanother 150 or 200 basis points of operating margin in the GEO product line. Soif successful there, that would take it to something in the neighborhood of 9%by 2009.

Now, with regards to Orion, we arelooking at what we believe to be a suitably conservative rate profit on thatcontract.

We are still early; we are notyet at the 20% point from the standpoint of our current contract value. Sowe’ve got a long way to go and very much like we did four or five years ago onthe Orbital Boost Vehicle program for Missile Defense. We want to get a littlefarther into this contract to get a couple of award fees under our belt beforeit would be appropriate to adjust the profit margins.

We certainly expect over thelong-term to have some opportunities to improve margins there. But in the earlyphase of the contract we think it’s the right thing to do to be on theconservative side.

Troy Lahr - Stifel Nicolaus

And is that something that wouldoccur in 2008? Is that when you start getting some of these award fees, or isit more like in 2009?

Dave Thompson

We’re just about to get our firstone now and because it represented the start-up phase of contract, it coversthe first year of our work on the Orion program, yet from here on we expect toget work fees about every six months. So, yeah, I think by the middle of thenext year with our performance justifies it, it would be reasonable to start toseeing some selected tick off. We certainly have the opportunities and hope tocapture some of those opportunities to improve our margins a bit.

Troy Lahr - Stifel Nicolaus

And does that ramp, going in thenext year or is it more of a flat type of business?

Dave Thompson

It’s been much stronger this yearthan we expected, in part because of some new work or some contracts scopeadditions that we’ve been given, which is great, and also because we’re now inthe phase when our sub-contractors for rocket motors and other equipment arereally ramping up. However, even though it has grown more rapidly this yearthan we expected, we continue to believe that the revenue ramp up is not overand that next year will be stronger than this year on the line.

Troy Lahr - Stifel Nicolaus

Okay. And then last question on Taurus II. You said you could have a$15 million impact or I guess $0.12 to $0.16 which I guess, that kind of backsinto about $15 million. Is that likely to repeat in 2009, or a 2009 customerfunding would fully offset that, and then you probably wouldn’t see an impact?

Dave Thompson

It's hard to say right now Troy. Our current modelsuggests that 2010 is the year of limited profitability and also of limitedpositive cash flow and that 2009 is likely to be a year, if we proceed, ofadditional pressure on EPS and also although probably not quite as the level ofthe cash flow commitment in 2008 of cash used by the program.

I think I'll wait until we get alittle farther into it in terms of estimating the magnitude in 2009. It woulddepend on the timing and details of early contracts which will be one of thosebig factors that we'll be considering, if we go forward at the end of thisyear, and when we get to the third checkpoint in the August or September periodnext year for that last go-now-go decision.

Troy Lahr - Stifel Nicolaus

Okay thanks guys.


Your next question comes fromline of Howard Rubel with Jefferies.

Howard Rubel - Jefferies & Co

Thank you very much. Just acouple of things. David, to go back for a moment, you are adding a lot ofpeople and you've been able to keep your SG&A constant, both in dollarterms and obviously lower as a percent of revenues. Are these people all goinginto support production or could you explain that little bit?

Dave Thompson

Yes, Good morning Howard. That’sgenerally correct. Most of the vast majority of the new people here who joinedthe company are going into engineering and manufacturing positions, probablywith a little more focus in the recent months on manufacturing, integration andtests. And very few of the new additions are in overhead or indirect positionswe been. We built up most of what we need there over the last couple of yearsand expect to be able continue to expand for the next couple of years with thisproportionally low increases to G&A cost.

Howard Rubel - Jefferies & Co

Just two more questions. One is,cash flow was better then you had expected. What were the factors behind thatGarrett?

Garrett Pierce

The principal driving force wasthe GEO Satellite product, it was the business with we booked and the paymentsthat we've negotiated. That has been the principal driver of the improved cashflow Howard.

Howard Rubel - Jefferies & Co

And then, to go back to sort of,for the commercial Satellite market for moment David, how would you characterizeit. I mean, it looks like you've had great year so far, is that where you areseeing your bidden proposals or are there more things in government space? Youdid talk about a military customer.

David Thompson

Yes. That’s right. Well, in thethird quarter, we booked a scientific satellite contract from NASA’s JetPropulsion Laboratory, and we also booked a military satellite contract withthe Air Force. As we look out over the next nine months, really through themiddle of next year, the satellite pursuits that are on the radar screenthrough that time, currently number, I believe eleven potential satellites.

Unlikely we will win all ofthose. But the eleven that we either have bids outstanding on today or that wewill be preparing and submitting proposals on later this year or in the earlymonths of next year, breakdown into six commercial communication satellites,and five scientific and defense satellites to potential government customers.

The six commercial satellites are-- three of the six are to customers and Asia,two of those are existing customers. One, if we were successful would be a newcustomer, two of the six commercial satellites are in North America.

Both of those with existingcustomers, and the final satellite is in Europeand that’s with a potential new customer. So, there may be a few others thatpop up, but those are the ones that are in the serious pursuit phase now,representing either proposals that have been submitted or work that were doing,and G&A that we're budgeting between now and next June.

On the scientific and defenseside, of the five opportunities that are driving most of the new business work,two of those five are in the national security area, military and so on. Andthree are in the science and technology area. All of those in one form oranother are with existing customers or closely related organizations.

So that's the outlook, I think, apretty good one. Our targets for next year would be to win for commercialsatellites throughout the year, and I have only talked really here about thefirst half of next year, and as well as the last couple of months of this year,and hopefully two or three government satellite. So, six or seven in total,with more than half of those being commercial, but was a significant contributionfrom military and science customers as well.

Howard Rubel - Jefferies & Co

I'm sorry, just to do -- thankyou, that's great. I just had one last thing and I apologize. Could you give usa sense of what you think the range on the return on capital, return oninvestment in the Taurus programs might be -- the Taurus II program?

Dave Thompson

That's one of the things ofcourse we're looking at, is we both as we approach this end of the yeardecision point, and we continue to evaluate it if we go forward as we gothrough the projects.

What I would say at this pointis, since - and I am qualified of seeing preliminary so on is that, per monthinternal rate of return perspective we believes that the Taurus II program iscarried out within – with the assumptions and within the confines that webelieve it can be done for - the IRR would be somewhat in excess to 25%. But Idon’t probably want to get a lot more precise at this stage of the game. So itwould be quite healthy.

Howard Rubel - Jefferies & Co

Well I have to do some of my ownwork on that. Thank you gentlemen for your answers.

Dave Thompson

Thanks Howard.


Your next question comes from theline of Gary Liebowitz with Wachovia Securities.

Gary Liebowitz - Wachovia Securities

Good morning, gentleman,

Dave Thompson

Hi, Gary

Gary Liebowitz - Wachovia Securities

Dave I am trying to reconcile therevenue guidance to preliminary guidance for 2008, with some of the rates thatyou‘ve been adding new people. According to J.R.'s comment you might be up 500people or so this year, and they are mostly going to the production. Thatdoesn’t seems to be consistent with the revenue guidance. Where are some in therisks to the numbers, and/or is this just typical October conservatism?

Dave Thompson

Well as Garrett said, this is ourfirst look at 2008. We have not finished our internal business unit review; afair amount of that work is still ahead of us over the next couple of weeks.

And, so when we talk again witheverybody with our full year and fourth quarter results in February, we’llprovide an update if that seems to be more warranted. I think what we’ve seenthis year has been quite surprising to us. We thought there was some upsideswhen we provided our early guidance to you this time last year, and even a wellinto the early month of this year.

I think we were a little bitsurprised above and beyond the identified upside, with both declining of ournew commercial satellite orders that came in. In total they were at about the levelwe expected for the year, but they all came in the first three and half or fourmonths of the year. So we ramped up headcount and revenue on those contractssome months earlier than we might have expected.

So that’s been one factor. Theother factor has been the surprisingly rapid ramp-up of the Orion program, andto a lesser degree the somewhat stronger than expected growth in our TargetVehicle product lines or missile defense.

In fact, we look just at say inthe third quarter of this year compared to the same period last year; about 75%of revenue growth came from the GEO Satellites and the Human Space Flightworked on Orion, and the other 25% came from the missile defense programs.

And some of that was - thatupside was identified, we didn’t know if it would happen or not, and some of ithas just gone beyond either in doing timing or in magnitude what we expected.And as we get a little closer in to next year, we'll asses whether it’s theright thing to do to review the guidance in the early months of 2008.

But at this point we feelconfident in the preliminary guidance, and we'll just have to wait and see ifwe get a couple of months into next year, what takes place.

Gary Liebowitz - Wachovia Securities

Okay, thanks. And I just wantedto follow up. I guess M&A activity is still on the radar screen, but wehaven't seen any yet, and it seems like your organic opportunities aresubstantial. Should we not expect too much in a way of M&A going forward?

Dave Thompson

Well that's a tough question togive a really meaningful answer to. We've talked in the past about -particularly over the last year or so about a balanced approach to cashdeployment that would have three prongs. New product developments, whetherthat’s something big like Taurus II or several or more modest investments, butnevertheless new product development to feel growth not so much in 2008 butbeyond that time would be one prong which we're certainly pursuing.

Secondly to mention what we'vepursued which, Garrett indicated pretty aggressively over the past three yearsor so, we would be improving our capital structure through stock repurchases,and I would expect that to continue.

And the third element beingacquisitions that make good strategic and financial sense. We've been prettyactive at looking at things that fit our themes, but so far for reasons thatvary from case-to-case, we haven't gotten to the point with where we are readyto make a move in that direction.

We are going to continue to spenda fair amount of time looking at things that could accelerate our growth inareas like the military and intelligent satellite market, and perhaps in otherareas.

And we are going to, I think,very naturally be able to maintain sufficient financial flexibility such that amoderate sized acquisition that otherwise made sense came into focus, that wecould do so without straining the balance sheet. But it's very hard for me togive you a sense right now as to the likelihood of something like that takingplace over the next year.

We certainly haven’t walked awayfrom it as an element of - reached the potential element of our strategy, but Ihave to say I don’t have anything concrete to show you on it today.

Gary Liebowitz - Wachovia Securities

Okay, Dave. And just oneclarification, you mentioned Taurus could be a $150 million to $200 millionannual product line. Did you say starting when?

Dave Thompson

I think that would be, kind ofthe, what would I call the already steady stage revenue for the business. Soprobably what that means in time would be the 2011, 2012 interval.

I think there is potential as youget farther into the lifecycle of the product to do better then that. But 2010right now is as we see at the year of the first couple of launches to prove outthe vehicle.

And hopefully customers beyondthose first few would be commenting prior to those launches, but probably notleading to rates of three or four year until 2011 or 2012, which is what getsus to the $150 million to $200 million a year.

So I think 2011, if things gowell or 2012?

Gary Liebowitz - Wachovia Securities

Thank you very much.

Dave Thompson

Thank you, Gary.


Your next question comes from theline of Patrick McCarthy with FBR.

Kevin Grasmick

Hi, good morning. [Kevin Grasmick]for Patrick McCarthy. Just a quick question. You had mentioned earlier on thecall, some cost growth in Launch Vehicles segment. I was just wondering if youcould provide any granularity on that. Thank you very much

Dave Thompson

Sure, good morning. We wereanticipating whether the growth really came primarily from certain fixed coststhat are allocated across active Launch vehicles programs in our space launcharea.

And in magnitude that was lessthan $1 million, and basically it had dowith a delay in some follow-on orders, and therefore the current set ofcontracts had to absorb a greater than expected amount of annual fixed cost,because the new orders didn’t materialize as soon as expected. And so that’sthe essence of it.


Your next question comes from theline of Chris Donaghey with SunTrust Robinson Humphrey

Dave Thompson

Hi. Good morning Chris

Chris Donaghey - SunTrust Robinson Humphrey

Garrett, I wonder if you can justexplain to us the fourth quarter guidance from margins, because it still lookslike you are predicting, and I apologize if I missed this early, but a prettystrong sequential move is in operating margin in the fourth quarter. Now, isthat segment specific or there award fees coming later this year any contract closeoutsthat might impact that?

Garrett Pierce

Yeah, we do expect a strongerquarter in terms of return on sales, and we are looking for that, really acrossthe board and all of our segment's incremental improvements which should bringa higher return in the fourth quarter than we ran in the prior three quarters,which should bring us in at about 8% for the year. So it's really in all of oursegments. And it would be specifically in the GEO product area that we'vetalked about before and that where our Launch Group, really across most of theproduct lines there.

Chris Donaghey - SunTrust Robinson Humphrey

Okay great and again from a macroperspective, you're delivering 30% revenue growth across the board in 2007, butthe guidance at the high-end for 2008 is somewhere around 5.5%, growth withtheir things pulled forward into 2007 that you just weren’t anticipating. Iknow Orion, at least from my perspective, grew a lot faster then I would haveexpected in 2007. Just can you explain the dynamic there?

Dave Thompson

Chris, I need you to put yourfinger right on it, at least probably the bigger single part of the growth thisyear. The other major unexpected contributor to the 30% or so growth this yearwas not so much the magnitude, but rather the timing of the commercial GEOsatellites orders are all coming early in the year.

We thought we'd have a very goodyear, but we thought it was -- the orders will be a little more distributedthroughout the year with all of them coming basically by the middle of April,at least so long so far. We got in a few cases four-five months or six monthsof revenue generated under those contracts that we didn’t expect.

So those were the two maindrivers that had the effect of taking our initial revenue target for this year whichwas -- if I remember back a year ago, it was around $900 million and increasingit by now up $150 or so million.

If you look over a period of acouple of years, again preliminary guidance for 2008 would reflect 16% or 17%compound annual growth rate over a year at two or a three year looking back into the vault versus 5% or 6% on just a single year basis.

And that's I think largely --well, first of all, it is preliminary, and secondly, it reflects the extra -- Idon’t know if you want, say its all extra $150 million, but certainly an extra$75 or $100 million of revenue this year that we just didn’t see coming at allthis time last year.

Chris Donaghey - SunTrust Robinson Humphrey

Okay, great. And just to finishup on Orion, it was my expectation coming into the year that Orion was probablygoing to be about, or at least the initial expectation was around $60 millionin '07, and it sounds like it is going to be at a $100 million and you‘resaying that you do expect to see growth in that program in 2008.

Dave Thompson

Yes, that’s correct Chris. Infact, it will probably this year be closer to a $125 million in 2007. So, it'sdoubled roughly, maybe even a little more than that compared to our earlierplans, and I do expect a growth on this year’s number, next year.

And hopefully we'll get somemargin. We’ll have the basis for a little better margin, so we’ll have to see.

Chris Donaghey - SunTrust Robinson Humphrey

Okay. And is that all related to LaunchAbort System or have you seen your scope expand beyond just the Launch AbortSystem part of the project?

Dave Thompson

It’s mostly related to the LaunchAbort Systems. We did win a contract early in the first to second quarter, Ican't remember, where we were also building some abort test boosters to help intest like of the aligned systems, but most of what’s happen this year has beendriven by expanded scope of additional test units. A variety of other things onthe board system itself, escape system itself.

Chris Donaghey - SunTrust Robinson Humphrey

Okay, great. Thanks guys

Dave Thompson



Your next question comes from theline of Michael French with Morgan Joseph

Michael French - Morgan Joseph

Good morning gentlemen.

Dave Thompson

Hi Mike.

Michael French - Morgan Joseph

Hi. Well, most of the big topicshave been addressed; this is just a follow-up on the M&A questions. Doesthe probability increase that you would dispose off TMF if you decide toproceed with the Taurus II investment? So where you could resources to continueto pursue other M&A that will help you with the military satelliteobjectives?

Dave Thompson

Yeah I think that's probably areasonable assessment. TMS has really turned around its performance over thelast two or three years. And it's also had a very strong run of new orders andfollow-on contracts from existing customers over the last couple of years.

I mean, J.R. decided, somethinglike a 75% win rate or market share, so far this year on new competitions. Soit's really doing quite well. Nevertheless, over the long-term, we think itwould be better for our shareholders and for the business for us to find adifferent home for TMS, and that is something that we may well be looking inthe fairly near term.

Can't predict what will come ofthat, but, if something did develop there, that would add to what I think isalready a very strong balance sheet, so that we could pursue some acquisitionsthat would be more strategically aligned with where we are heading.

Michael French - Morgan Joseph

But what are thinking in term ofvaluation for this business with the great strategic buyer?

Dave Thompson

That's a tough one. I'll justprobably have to -- I mean, I think I'll have to duck that one Mike. I mean thebusiness has improved a lot, if you look at the third quarter, I think it wasseven -- I forget the exact margin, I think it was clinical.

I think it was 9.5% operatingmargin in the quarter, as Garrett said, a good bit of that is a result of ashifting mix in the TMS business towards follow-on orders that tend to be moreprofitable. But some of it is also driven by improved margins on initialinstallation.

So its -- and its running on aannualized basis, close to $50 million a year in revenues. So, you know withthat, I'll let you guys complex the multiples and obviously unless Garrettwants to --

Garrett Pierce

We decide -- if we decide tosell, we will run a robust process and let the market determine it, that thebusiness is doing well right now, very well, both in terms of its market share,its profitability, cash flow generation, etcetera.

Michael French - Morgan Joseph

Okay. Well, thank you gentlemenand good luck.

Dave Thompson

Thanks Mike.


Your next question comes from theline of Steve Mather with SMH Capital.

Steve Mather - SMH Capital

Well, thank you, and goodmorning. And congratulation on your year of successes.

Dave Thompson

Thank you, Steve.

Steve Mather - SMH Capital

A couple of questions. Whatdrives your Taurus to economic improvement? Is it with design features or justan overall ability to start with a clean slate and reinvent the fixed coststructure, something kind of the legacy competitors couldn't do?

Dave Thompson

Well, both of the things you'vesaid are at work. I would answer it this way; I think there are really threefactors that we are trying to bring to bear here. The first one is pretty muchunique to Orbital.

And as the ability that we haveto leverage the existing technology, engineering and manufacturing work forceand supply chain on our current small Space Launch vehicles and missileinterceptor vehicle programs to minimize both new R&D investments, and alsoto get economies in production.

A lot of new Launch vehicleprograms start off assuming that, the market is going to be very robust andthey're going to build ten a year, and they're surprised later when the marketisn’t always as good as they assume.

In our case by pushing frommaximum commonality at the technology work force and supply chain level, we canaggregate total annual production of 20 or 25 vehicles that will then beallocated to -- whether it’s the Taurus II program or Missile Interceptors orsome of the small Launch vehicles.

So that’s the first factor that’sat work. The second factor is an approach we are taking on Taurus II to workwith some lower cost suppliers for what I would describe as some of the mediumtechnology elements of the vehicle, some of these being offshore suppliers.

And the third element which issomething we've often done in the past, but has not really been done to datewith a medium class rocket, is to keep our annual fix cost low by having a leanproduction and launch site infrastructure. Some of the older technologyvehicles, although they have been quite successful had a design approach thatrequired a fairly extensive physical infrastructure at their launch site on theeast and west coast of UF.

And the maintenance and upkeep ofthose sites has factored in, in a significant way, particularly as launch rateshave fallen over the last couple of decades from eight or ten a year, down thesix or seven a year in this class.

So, I think it's really acombination of those three things that we believe should allow us to offer theTaurus II at about a 50% lower launch price than the current Delta 2 rocketthat provides roughly comparable performance.

Steve Mather - SMH Capital

You gave good points. Just oneother question. Your thoughts on Missile Defense, in general, it seems like theevolution of KEI is going to happen, when you're year from launch, and it seemslike the budget is going to continue along with that.

And of course, GMD is going fine,you know, the long-term contracts are going, and all this. Right, I'm justwondering if you can give us a little bit about your -- just kind of youropinion about that whole market space over the next few years, and budget flowsand things like this?

Dave Thompson

Well, the near come outlook forthe Missile Defense agency which is the primary government department that'sinvolved in Missile Defense programs is that their budget in fiscal year 2008will probably be down 5% to 7%, relative to their budget the prior year.

When you factor in the Air Force,Army and Navy contributions to the program, the drop won’t be quite as much,but nevertheless, top line growth in the US government Missile Defenses isprobably going to be pretty limited.

On the other hand, we have nowjust about finished the first congressional cycle with a democratic majority inboth the house and the senate, and they have not agreed to every requesteditem.

But in general, I think theMissile Defense programs have done pretty well, and the budget drop largelyreflects just where things are in the different programs and how much money isneeded at this point.

Now reducing all that down to ourlevel, our two main programs are the GMD National Missile Defense System andthe KEI Mobile Defense System, and the focus is sharpened on both of thoseprograms over the past year or so, in ways that work to our advantage withregard to GMD.

This time last year, MissileDefense agency made the final decision to terminate the back-up interceptor andto put our vehicle as the only one that they are going to be using and as J.R.indicated earlier this year, we were put under contract to develop a two stagevariant of the OBV that is primarily destined for the European deployment, butalso could be used in the US missile fields as well.

On KEI the focus has sharpenedvery much on the interceptor and its flight test coming up next year.

And KEI is a program that is kindof blocking the overall trend within the Congress. They have, again apparentlyof course they are not quite finished yet with this fiscal ‘08 budget, but itlooks like when the dust settles that KEI will get some 25% to 30% greaterfunding in the new fiscal year than was requested by Pentagon.

So I think the short-term outlookis okay. Long-term I think it’s going to depend on two factors. One, how wellthe Missile Defense Agency, and all of those of us that work for it, do in futureflight tests. It's had a very good record over the last couple of years, andwe’ve been trying to contribute to that in some ways. But continuing thatsuccess as the testing gets more and more challenging will be big factor.

And then the other consideration,we’ll just see what’s going on in places like North Korea and Iran andelsewhere, that represents the areas of concern that Missile Defense Systemsare intended to guard against throughout the next decade.

So, the good news I thinkcompared to four, five or six years ago is, the technology has come a long wayimproving itself, it’s not to the point yet where it has been stressed as muchas it will be. But it’s surprised most of the critics in how well it has towork.

And so I don’t thinks it’s asmuch of a - perhaps an issue any more, it’s sort of enter around of normallarge weapon systems and, you know, does it need a real and are the programsbeen executed well? Right now, I think, the answer to both of this is yes, andhopefully that will lead a pretty good continued support for Missile Defensewell into the next decade.

Steve Mather - SMH Capital

Thanks, Dave for that perspective

David Thompson

Okay Thank you


And our final question comes fromthe line of Tyler Hojo with Sidoti & Company

Tyler Hojo - Sidoti & Company

Hi, good morning. Just curious,hypothetically speaking, if you decided to proceed with Taurus II in December,but then come your final checkpoint in the summer, you decided not to proceed.What would you think that the cost would be? Just trying to get anunderstanding for some of the timing behind this?

David Thompson

Yeah good morning Tyler, that's a goodquestion, one we are still looking at now. As a first approximation, I thinkwhat that would mean. I don't think that's likely. But if that happens, what Ithink that would mean is the ranges that we've given for next year would be cutroughly in half.

Tyler Hojo - Sidoti & Company

That is enough. And just onemore. I'm not sure if you guys are willing to do this, but just in terms of theguidance that you provided for '08. Would you be willing to give us a segmentrevenue growth rates and operating margins.

David Thompson

I think I could give you a fairlybroad-brush picture of that.

Tyler Hojo - Sidoti & Company

That be helpful.

David Thompson

Okay. This will be without TaurusII, just so it corresponds to the baseline guidance that we've given you.

Tyler Hojo - Sidoti & Company


David Thompson

I think what we are likely to seein our Launch Vehicle segment is pretty good growth. And if I had to, I wouldsay in the range of 10% revenue growth in launch vehicles, and probablysomething like 50 basis points improvement in margins. Again those areintentionally [round] numbers.

In Satellite and Space Systemsprobably 5% revenue growth at least for the time being until we get a littlefarther partner along, and probably a little less than 50 basis points let'ssay 30 to 40 basis points improvement overall in operating margins.

And then finally the smallest ofthree TMS, probably 20% revenue growth, and 100 plus basis points improvement,may be 150 basis points improvement in operating margins. And those are notcompared to third quarter margins, but for the full year margins '08, versus fullyear margin of '07.

Tyler Hojo - Sidoti & Company

Thanks so much.

David Thompson

Okay. Thank you Tyler. I think at this point we will bringthe discussion to a close. I want thank you all again for joining us for thecall this morning, and we look forward to talking with you in the future. Thankyou very much.


Ladies and Gentlemen thisconclude today's conference call, you may now disconnect.

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