Orbital Sciences Corp. Q4 2007 Earnings Call Transcript

| About: Orbital ATK, (OA)

Orbital Sciences Corp. (ORB) Q4 2007 Earnings Call February 14, 2008 9:00 AM ET


David W. Thompson - Chairman and Chief Executive Officer

Garrett E. Pierce - Vice Chairman and Chief Financial Officer

James R. Thompson - Vice Chairman, President, and Chief Operating Officer


Michael French – Morgan Joseph

Hunter Keay – Stifel Nicolaus

Patrick McCarthy - FBR Capital Markets

Gary Liebowitz - Wachovia Securities

Chris Donaghey - Suntrust Robinson Humphrey

Howard Rubel – Jefferies & Co


At this time, I would like to welcome everyone to the Orbital Sciences fourth quarter and year-end 2007 financial results conference call. (Operator Instructions) I will now turn the conference over to David Thompson.

David W. Thompson

Thank you, Casey, and good morning everyone. Thank you all for joining us today for our fourth quarter and full year 2007 financial results discussion. I am Dave Thompson, and with me on the phone today are J.R. Thompson and Garrett Pierce.

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

We will follow our customary outline for the call. I’ll begin by discussing some highlights from the fourth quarter and the full year, and then turn it over to Garrett, who will cover our fourth quarter and full year financial results in greater detail and also update you on our financial guidance that we first provided last fall.

After that, J.R. will recap recent space missions and major system deliveries. He’ll also provide a preview of upcoming launches, system deliveries, and other significant operational events that we have planned over both the next three months and for 2008 as a whole.

Finally, I’ll address recent new orders and contract backlog, as well as our new business outlook for the year ahead. And at that point, we’ll open up the call for your questions.

To set the stage for today’s discussion, I’ll begin by highlighting three areas in which Orbital’s fourth quarter and full year performance were particularly noteworthy. We’ll cover each of these in more depth later on in this morning’s discussion.

First, though, is our financial performance. Orbital generated exceptionally strong financial results in the quarter and for the year, setting across-the-board records for revenues, earnings, and free cash flow. Our revenues increased 36% to about $293 million in the fourth quarter and were up about 35% to $1.084 billion for the full year.

Quarterly operating income rose 18% to $24.1 million and annual operating income was up 27% to $86.4 million for the full year. The company’s earnings per share jumped 30% to $0.26 in the quarter and increased 45% to $0.93 for the full year, both compared to last year’s or 2006’s adjusted EPS results.

Free cash flow was a little over $38 million in the quarter and about $82 million for the year. This gives us an end-of-year cash and marketable securities balance of about $265 million, and that’s after subtracting approximately $8 million that we used to repurchase common stock in the fourth quarter and about $33 million that was used for stock buybacks during the year.

The fourth quarter of 2007 was our 20th consecutive quarter of positive free cash flow with the company having generated over $300 million in cumulative free cash flow since the beginning of the 2003. Garrett will give you the financial details on the quarter and the year and update our guidance for 2008 in just a few minutes.

Next, though, I’d like to comment on our operational highlights from the last three months. An active fourth quarter capped one of Orbital’s busiest years ever from an operational standpoint, with the company building and delivering 58 launch vehicles, satellites, and other space systems, and completing six Transportation Management Systems projects in 2007 for, on average, a major operational event every six days last year.

In the final three months of 2007, we launched three major target rockets and deployed and checked out three geostationary communications satellites, while also completing production and delivery of five other rockets, one additional satellite, and several other space systems that will be launched this year.

Looking ahead, we expect 2008 to be an even more active year than 2007 was, with some 70 major operational events, rocket launches, satellite deployments, and other system deliveries scheduled this year. J.R will give you more details on what’s planned over the coming three or four months in just a few minutes.

And, finally, I’ll comment on our new business activity. With about $250 million of new contracts and option exercises in the fourth quarter, the company won a total of just under $1.98 billion in new business awards in 2007, which sets an all-time record for annual new business volume for us. We also ended the year with record contract backlog reflecting about a 15% increase over year-end 2006 backlog levels.

Looking ahead, Orbital currently has outstanding proposals and other active pursuits with a potential value of between $800 and $900 million. So I’m optimistic that the strong rate of new bookings that we experienced in 2007 will continue into the first half of 2008 as well.

I’ll provide some more details on this topic and also updates you on the status of our Taurus II Launch Vehicle development and marketing program later on in this morning’s call.

First, though, I’d like to ask Garrett to take us through the financial results from the fourth quarter and the full year and to update you on the preliminary guidance for 2008 that we first provided last October.

Garrett E. Pierce

Thank you, Dave. Good morning. Before commenting on the financial results, I want to note that during this call, we will provide certain non-GAAP financial measures.

A reconciliation of these measures to comparable GAAP financial measures can be found in our earnings release, or to the extent not addressed there but discussed in this call will be available as an appendix to the transcript of this call and will be posted under the investor relations heading in our website.

As Dave indicated, we had a record-breaking fourth quarter and year for 2007. Revenues, operating profit, and free cash flow reached an all-time high. Revenues increased by 36% or $77 million in the fourth quarter of 2007 compared to 2006. Operating income increased by 18% or $3.7 million over the fourth quarter of 2006.

For segment reporting purposes, you will note that we now have a fourth reporting segment known as the Advanced Space Programs, which is comprised of the Orion human spacecraft program, certain defense programs, and other leading-edge programs. Previously, the financial results of this segment were combined in our Satellite and Space Systems segment.

Reflecting this part of our business as a separate segment is consistent with the growing materiality of this business area, and it provides additional insight into our financial results.

Each of our business segments reported increases in revenues for the fourth quarter of 2007 led by the Advanced Program segment, which reported a revenue increase of $36 million or a 200% improvement driven by the Orion program.

The Launch Vehicles segment increased by $24 million or 30% driven by increased activity in the target and interceptor product lines. The revenues in our Satellites segment increased by $14 million or 13%, and were driven by the GEO satellite business.

Finally, the Transportation Management segment increased by $3 million or 28% due in part to the execution of the increased contract backlog in its parts business.

For the fourth quarter, operating income increased 18% or $24 million led by our Launch Vehicles and Advanced Space Program segments. Operating income in our Launch Vehicles segment increased by $2 million or 24% driven by our targets and interceptor vehicle programs. The Advanced Space Programs segment increased by $2 million or 137%, which is primarily attributable to the Orion program.

Operating income in our Transportation Management segment increased by $600,000 or 61%, and the Satellite and Space segment decreased by $1.1 million or 12%, primarily as a result of a significant favorable profit adjustment on a satellite contract recorded in the fourth quarter of last year.

Revenues for the full year increased by a record-breaking 35% over 2006, an increase of over $280 million. The most significant increase in revenue was the Advanced Space Programs segment, which increased $124 million or 243%, propelled by the Orion program.

The Satellite and Space segment system grew by 14% year-over-year, and that increase was driven by the GEO product line. Revenues in the Launch Vehicles segment increased by $85 million or 27% primarily driven by the suborbital target and interceptor product lines. Finally, revenue in the Transportation Management Systems segment was up $12 million or 33%.

Full year 2007 operating income was up by $18 million or 27%. Operating income increased in all business segments with the Advanced Space Programs segment increasing $8 million or 191%; Launch Vehicles segment by $5 million or 16%, and the Satellite segment by $3 million or 11%; and again, finally, the Transportation Management Systems segment by $1.4 million or 54%.

Interest income decreased almost $2 million in the quarter and $7.6 million for the full year due to a reduction in our interest rate on a long-term debt from 9% to 2.45%. Fourth quarter 2007 net income increased by $3.3 million or 26% compared to adjusted net income; that is, excluding the net after-tax effect of one-time charges of $4.7 million in the fourth quarter of 2006.

Approximately, 65% of this improvement is due to revenue and operating income growth with the balance attributable to increased interest income and the company’s significantly improved capital structure and related lower cost of capital. For the year, net income increased $16.9 million or 43%, compared to adjusted net income in 2006.

During the fourth quarter, Orbital purchased 400,000 shares of its common stock at a total cost of $8.4 million, an average price of $22.82 per share. These purchases were authorized as part of the Board of Directors’ $50 million stock buyback program, approved in April of last year.

Since April, we have spent $33.4 million of the current $50 million authorization to buy our common stock. To recap, since the inception of our stock buyback program in 2004, we have purchased 9.2 million common shares at a total cost of $145 million and an average price of $15.71 per share.

Diluted EPS was $0.26 for the fourth quarter of 2007 compared to adjusted diluted EPS of $0.20 for 2006, an increase of 30%.

There were 60.6 million weighted average diluted shares in the fourth quarter outstanding as compared to 62.7 million in the fourth quarter of 2006, a net reduction of 2 million weighted shares, reflecting our stock buyback program, partially offset by a routine issuance.

Full year diluted EPS for 2007 was $0.93 compared to $0.63 adjusted diluted EPS for 2006, an increase of 48%.

Free cash flow for the fourth quarter was $38.3 million, net of $5.9 million of capital expenditures. This reflects, in part, progress payments received in our GEO satellite product line.

For the full year 2007, we generated $81.9 million of free cash flow net of $18.5 million of capital expenditures. Over the last four years, our cumulative free cash flow has exceeded $270 million.

We are increasing our 2008 financial guidance that we provided last October. Excluding the effects of Taurus II program, we are targeting revenues in 2008 to be in the range of $1.1 billion to $1.125 billion, an increase of $25 million.

Operating income remains in the 8.25% to 8.5% range, with diluted EPS in the range of $0.95 to $1.00, an increase of $0.02 per share, based on approximately 60.3 million outstanding shares.

Our 2008 free cash flow guidance remains, as previously announced, in the range of $75 to $80 million, including capital expenditures of $20 to $25 million.

As previously announced, assuming that we continue to proceed with the Taurus II development program, we are estimating the Taurus II product line could increase 2008 revenues by $25 million.

However, EPS in 2008 would be reduced by approximately $0.12 to $0.16 per share and require the use of $40 to $45 million in cash for research and development, capital expenditures, and working capital requirements.

Revenue and cash flow could improve in 2008 if Taurus II orders materialize sooner than planned this year. We should know with high confidence by midyear whether the Taurus II program is on track with only $0.04 to $0.06 EPS and $15 to $20 million cash flow spent in the first half of 2008.

Our management team is prepared for and looks forward to the opportunities as well as the challenges that will be presented in 2008. We enter 2008 with a record backlog, a strong operational performance trend from 2007. We aim to continue this positive performance through 2008 and beyond to generate additional increases in shareholder value.

Now back to Dave.

David W. Thompson

Very good. Thank you, Garrett. I’d now like to ask J.R. to update you on the company’s major operational events that took place in the fourth quarter and also give you a preview of what’s ahead this year.

James R. Thompson

Thanks, Dave, and good morning. As Dave and Garrett have both reported, the fourth quarter operational results were excellent and capped off an outstanding 2007 full year.

During the quarter, six missions were successfully executed; three GEO communications satellites, a medium-range target, which was intercepted by the Japanese Navy, equipped with a standard Aegis missile defense system and two Coyote supersonic sea-skimming targets, in an operational exercise with the U.S. Navy, resulting in another successful intercept.

Looking at the full year, four operational events stand out. First, the launch and checkout of Dawn, Orbital’s first interplanetary spacecraft, which is now well on its way to a close fly-by of Mars in early 2009, and then to rendezvous and survey two of the largest asteroids in the solar system.

Second, another successful full system intercept test of our Orbital Boost Vehicle rocket, providing increased confidence in the 24 long-range interceptors that are in silos and on alert in California and Alaska.

Third, the deployment and activation of the new commercial communications satellites for Intelsat, JSAT, and Optus Networks in a 12-week period.

And fourth, back-to-back launches of Pegasus and Minotaur space boosters from the east and west coast within a 36-hour period, increasing the combined record for these two rockets to 38 straight successes over the last 10 years.

In addition to these full year results, the AIM NASA scientific satellite was successfully launched and checked out; 5 payloads were delivered for future missions; 13 major rockets were successfully launched, with a total of 23 rockets built and delivered during the year; 22 small scientific sounding rockets were launched for NASA, and 6 transportation management system projects were completed.

During 2007, our production programs have become the backbone of our revenue and profit growth. The GMD interceptor project now has 60 interceptors on contract, and we are expecting 9 more, with 10 additional orders anticipated to provide for deployment of these interceptors in Europe.

The supersonic sea-skimming project has 60 targets also under contract, with 13 more expected this year. And the GEO communications STAR2 series satellite business has 18 under contract or delivered, with 9 currently on order.

Each of these product lines have been highly successful and will continue to be the engines for profit margin expansion well beyond 2008, as we exploit opportunities for learning curve improvement.

To meet projected manpower needs, we continue to aggressively hire and train employees at all of our locations. Over 625 new employees were hired in 2007; 50% more than 2006, and we expect that trend to continue for several years.

The total workforce expanded 17% to approximately 3,400 employees at year-end. Facility expansion planned for Arizona will be available in March 2008 and in Virginia in early January 2009.

2008 will be an important year for us relative to major development activity, both government and company-funded. The Taurus II Launch Vehicle project team is making good progress, and this continues to be viewed internally as an excellent investment with broad customer enthusiasm apparent. Space Launch Vehicles have historically provided high profit margins for the company.

The government-funded KEI interceptor development is well along with the initial launch targeted for early next year. Work is proceeding on schedule to develop the launch abort system for NASA’s Orion spacecraft with the first pad abort test planned later this year.

The two-stage OBV interceptor work is proceeding as planned with subsequent deployment to silos to augment the current three-stage interceptors planned.

We’re also working on a new LEO STAR3 spacecraft that has potential applications for NASA space station cargo delivery, classified defense missions, and NASA science missions. Missions of this type fit well with the Taurus II Launch Vehicle capability.

Looking ahead, in the first quarter, we’re off to a good start with a successful launch early this week of the THOR 5 GEO communications satellite from Baikonur aboard a Proton rocket, with checkout of the spacecraft proceeding normally in geosynchronous orbit. Next month, we expect to launch two Coyote sea-skimming targets for the Navy.

In addition, we delivered a GMD interceptor to Boeing in January. The final ORBCOMM payload and two Coyote targets to the Navy are planned for delivery later in the quarter.

Delivery of a Pegasus rocket planned for a space launch carrying the CMOS payload and completion of two TMS contracts are all scheduled this quarter.

For the full year, operational missions include 5 satellite deployments; 4 GEO and 2 LEO; several space payload missions; 5 space vehicle launches; 2 GMD interceptor missions, and 12 to 14 target launches, and 5 TMS project completions.

And with that, now I’ll return the discussion to Dave.

David W. Thompson

Thank you, J.R. I’ll now report on fourth quarter and full year 2007 new business and contract backlog figures, and I’ll also comment on our general market outlook for the first half of 2008 and on the status of our Taurus II Launch Vehicle program to add a little bit to what J.R. has already said.

Orbital wrapped up 2007 with about $250 million in total new business activity in the fourth quarter. During the quarter, we booked approximately $225 million in new firm and option orders and received about $25 million in option exercises under pre-existing contracts.

For the full year, new firm and option orders totaled about $1.71 billion, while option exercises under previously awarded contracts amounted to $265 million for a total of just under $1.98 billion of new business volume.

The company’s fourth quarter new business activity by reporting segment broke down as follows:

Launch Vehicles received $70 million of new business, which was about 28% of our total;

Satellites and Space Systems booked $50 million or some 20% of the total;

Advanced Space Programs won $120 million or about 48% of the total;

And our TMS division accounted for approximately $10 million, the remaining 4% of our total fourth quarter activity.

For the full year, the four segment contributions were as follows: Launch Vehicles came in at about $505 million or about 26% of the total; Satellites and Space Systems added $910 million or 46% of our total activity; Advanced Space Programs won $480 million or 24% of the total; and TMS contributed $85 million or 4% of our total new business volume.

Some of the notable fourth quarter orders included these in addition to:

Our OBV interceptor program with Boeing, which is in the Launch Vehicles segment;

A national security satellite contract award from a classified customer in our Advanced Programs segment;

A significant payload add on to an existing commercial satellite contract with Intelsat in our Satellites and Space Systems segment;

And finally, an option exercise for another Minotaur IV space launch vehicle by the Air Force, also in our Launch Vehicles segment.

For the full year, commercial satellites led the way with some $725 million in new business. These were followed by missile defense systems with approximately $460 million; human space systems with about $365 million; and defense related satellites with approximately $200 million in new orders and options.

Looking at it in a little different way in unit terms, the company won new orders and received option exercises last year for a total of 33 launch vehicles, 12 satellites, and 6 TMS projects.

Reflecting the strong new business results last year, our firm contract backlog as of the end of December increased 15% to about $2.06 billon, and our total contract backlog rose 14% to about $3.90 billion, both compared to the respective backlog figures at the end of 2006.

By reporting segments, Launch Vehicles accounted for about 55% of firm backlog and 51% of total backlog; Satellites and Space Systems contributed 21% of firm and 26% of total backlog; Advanced Space programs added 21% of firm and 20% of total backlog, and TMS rounded out the story with 3% of both firm and total backlog at year-end 2007.

As we began this year, the company had approximately 91% of our projected 2008 revenue and a little over 61% of our anticipated 2009 revenue in our contract backlog.

Looking ahead to the first half of 2008, Orbital currently has in excess of $500 million worth of new business proposals that have been submitted and are currently under evaluation by customers.

We also have between $350 and $400 million more in preparation for submittals that will take place over the next couple of months. All of these are expected to be decided on by customers during the first half of the year.

Some of our strongest near-term prospects are potential new orders and option exercises for several additional commercial communications satellites, various missile defense target vehicles, and one or two additional U.S. government satellite programs.

In addition, we are pursuing new opportunities in the human space flight market, including a new NASA space station cargo transportation system that is referred to by the acronym COTS, which is expected to be decided on within the coming weeks.

Finally, as J.R. indicated, we have recently approved the second phase of development work on Taurus II, which will cover our activities from the beginning of this year through the vehicle’s final design review and production start point early this fall.

So far, the technical and cost aspects of the Taurus II development program are progressing well. In addition, we seem to be making good progress towards our objective of securing launch orders for the first Taurus II rockets, which would trigger the final phase of our investment in its development program later this year.

If we do proceed with its full development, which I think is likely, then we believe Taurus II has the potential to expand our current Space Launch Vehicle business at least fourfold over the next three or four years from about $75 million in 2007 revenue from our existing small space launch vehicles to well over $300 million in annual revenues by the 2011 to 2012 period due to the addition of the medium class Taurus II into the company’s inventory of space launch vehicles.

To wrap up, 2007 was an outstanding year among the very best in our quarter-century history. Orbital’s financial results exceeded targets for revenue, EPS, cash flow, and year-end backlog. Our operational performance was fast paced, consistent, and 100% successful, and our new business activity set a record for the company.

As always, strategic and operational challenges remain in our business, but we’re starting 2008 with very strong momentum and are looking forward to making it an even more productive and rewarding year for the company, our customers, and our shareholders than last year was.

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

Question-and-Answer Session


Your first question comes from the line of Howard Rubel – Jefferies & Co.

Howard Rubel – Jefferies & Co

First, if we look at the outlook for next year, not a lot of revenue growth maybe 3% or so, do you expect it to be pretty evenly spread or is it likely to be mostly in the Advanced Systems business?

David W. Thompson

Good morning, Howard. Let me take that to start with and then Garrett may want to add too it as well. I believe we are expecting good revenue growth in three of the four reporting segments this year.

The drivers at the product line level would be as follows: in the Launch Vehicles segment, our missile defense interceptors, both the, what we call the Orbital Boost Vehicle, which is part of GMD program and kinetic energy interceptor are expected to generate good revenue growth for us in 2008.

In the Advanced Program segment, military and intelligence satellites and human space systems are expected to be good contributors. And on top of that, although the absolute dollar figures are smaller in percentage terms, we expect TMS to also contribute strongly to top line growth.

Due to a drop-off in short-term activity in our science and environmental satellite area, the Satellite and Space Systems segment should be down for the year. But we may see some improvements in that as we get into the spring time depending on the timing of potential commercial satellite orders that we’re pursuing in the first half of the year.

So three of the four should be up; one should be down somewhat in revenue at the segment level.

Howard Rubel – Jefferies & Co

That’s very helpful, David. I appreciate that. And then on the other side, from an operational point of view, if we look at the fourth quarter R&D at almost $7 million, if you back out where you were a year ago, there is maybe $0.07 or so and improvement in the overall operations of the business.

Is all of the R&D in the Launch Vehicle area or is it spread a bit? The operating line looks okay, but then when you back out R&D, it’s very impressive in terms of the improvements. Maybe, you could address some of that, and then also where the R&D is going.

David W. Thompson

The major contributor to the R&D increase in the fourth quarter was our investment in the Taurus II launch vehicle. We didn’t think it was going to be significant enough to break out its impact at an EPS level for last year. But clearly, as we proceed this year, it will be. And so, we’ll try to give you visibility in all quarters this year to what EPS is and what it would have been in the absence of that investment.

There were a few other contributors to the increased R&D spending in the fourth quarter, both in our Satellite and Space Systems segment and also at TMS. But the lion share of the increase is attributable to the ramp up of Taurus II.

As Garrett indicated, for the year ahead, we expect to see about one-third of the total investment of research and development, capital equipment, and inventory build-up in the first half of the year relating to Taurus II and about two-thirds of the impacts for EPS and cash in the second half of the year for Taurus II.

Howard Rubel – Jefferies & Co

Thank you David, very much.


Your next question comes from the line of Chris Donaghey - Suntrust Robinson Humphrey.

Chris Donaghey - Suntrust Robinson Humphrey

Just on the COTS program, obviously NASA announcing the decision likely coming next week, and J.R. in one of his comments, he talked about the LEO STAR3 development and that having a cargo delivery option.

So, can you help us walk through what the anticipated funding for the COTS program is and how it would relate to current development efforts that you have ongoing with both LEO STAR3 as well as Taurus II?

David W. Thompson

Sure Chris, good question. Along with several other companies, Orbital submitted a proposal last November for a program that NASA is about to decide on for a demonstration mission to deliver cargo to the Space Station with an autonomous system; meaning a system that doesn’t have an astronaut crew onboard.

They embarked on a first phase of these demonstrations about a year and a half ago. One of those is still moving along, but the second one was terminated because the company was unable to meet its commitments to NASA.

So with about $170 million or $175 million left over from that terminated agreement, NASA has reissued a solicitation that we and others have responded to. It looks like NASA’s decision will be announced next week. We think we’ve put in a very good proposal, but we’ll have to wait and see what the Space Agency’s decision is. We’re hopeful, but we’ll just have to wait and see.

Should we be selected, it will be significant to us for several reasons. First of all, it would represent the first contract for our Taurus II rocket, and that launch would take place in 2010.

More, generally though, a COTS selection would be a critical step forward for us in our long-term strategy to play an expanded role in human space flight programs, a market segment that we have not been terribly active in up until the last couple of years.

So we would be adding to our current work on the Orion spacecraft this autonomous means of supplying the cargo to the International Space Station.

Beyond the demonstration program, which would run its course over the next two and a half years or so, NASA is expected later this year to issue a solicitation for operational cargo delivery missions that would begin in 2011 and continue for quite sometime afterwards, at least five years and potentially a lot longer.

So getting in on the demonstration program would position us very well to win a big fraction of the operational launches that could commence within about three years.

That gives us some real upside to our Taurus II business plan beyond that that had been considered earlier. And as J.R. indicated, it would also likely be one of the first uses for a new medium class, low orbit satellite that would have applications in earth science and certain defense-related missions as well as in in-orbit rendezvous with the Space Station.

So this has a number of very exciting implications for us. But we’ll just have to wait another week or so to see what NASA’s decision turns out to be.

Chris Donaghey - Suntrust Robinson Humphrey

Thanks for the detail, Dave. Just real quick on the satellite market as well, can you just talk about expectations for orders in the commercial satellite world as well as the government satellite world?

David W. Thompson

Let me take them in that order, beginning with the commercial satellite market. By our count, there were 23 commercial communications satellites, GEO communications satellites that were ordered worldwide in 2007. Coincidently, that’s the same number of commercial satellites that were ordered in 2006. So both years were quite robust.

Last year, of the 23 new satellites that were ordered, 6 were small satellites in the class that we compete for, and we won 5 of those 6 orders, which was a good bit stronger than we had expected. We were very pleased with that.

In fact if we now look back since the introduction of our STAR class of geosynchronous satellites, over the last seven years we’ve won just over 50% of the 35 or so orders that have been placed in the period between 2001 and 2007. So that’s looking backwards.

Now looking ahead, we are anticipating in 2008 a very similar level of aggregate demand as we’ve seen for the last couple of years; somewhere between 21 and 24 new GEOs are expected to be ordered this year, with 6, 7 or 8 being in the small class that we compete for.

We are targeting to win about half of those; 3 or 4 orders. And we believe we’ve a very good chance of picking up 2 of those orders during the first half of the year. One of those would be from a new customer for us; one would be from an existing customer; one in North America; and one in Asia.

So we are right now both in the near term, the next few months, and over the first half of the year expecting significant contribution to new order flow from the commercial satellite market.

In the government market, for a good bit of this year, probably most of this year, I think the military and intelligence satellite area will likely be our strongest. We had a very good year in that market last year for new orders. I think we are expecting that at least for the first several quarters of this year, that pace of new opportunities, and hopefully new wins, will continue.

Overall outlook for 2008 and 2009 is quite positive, with significant budget increases in both the unclassified and the classified military space area having taken place in 2008, and being budgeted in the new FY 2009 budget request that went over to Congress a couple of weeks ago.

The science and environmental monitoring business is the only down area right now for 2008. So, we don’t expect to see many new orders placed this year by NASA or other civilian government agencies.

However, as we look out towards the end of this year when the 2009 budget starts to become available, the outlook is a bit brighter in the NASA budget request that went over to Congress in the early part of February.

Just looking at 2009, there were funding additions for two new earth science satellites and three new small space science satellites. And we are in the running for, I’d say, at least one of the earth science and probably two of the space science satellites; those may not result in orders until late this year or early next year, and probably not in terms of any significant revenue this year, but for the mid-term, the NASA science and environmental satellite market is looking a little better than it has for the last few years.

So the outlook, I think, in the government area is going to be more strongly weighted towards military and intelligence programs this year, with the civil government programs we believe making a bit of a comeback in 2009.

Chris Donaghey - Suntrust Robinson Humphrey

Thanks again, Dave for all the detail. And Garrett, just a real quick on what do you expect the tax rate to be for 2008?

Garrett Pierce

About 40%.

Chris Donaghey - Suntrust Robinson Humphrey

Okay. Great. Thanks.


Your next question comes from the line of Gary Liebowitz - Wachovia Securities.

Gary Liebowitz - Wachovia Securities

Dave, can you just review for us if there are any upcoming milestones on the Orion program that might help the margins there?

David W. Thompson

Orion is moving at a very fast pace right now, as you can probably tell from the fourth quarter revenue results. We continue to stay on a very aggressive schedule for delivering the first two launch escape systems to Lockheed this summer.

The first of those is due for delivery in July, and it should be followed within four to six weeks by the delivery of the second system. The first system in turn will be used in the initial flight test with a boilerplate Orion capsule out at the White Sands missile range in the fall of this year. That will be the first flight test for the entire Orion program.

So it’s a very, very important that that go well and that that, if at all possible, stay right on track, and so far our work is doing so. So over the next six months, that’s going to be the focal point of our work.

If we can keep on track and maintain good technical, cost and schedule performance, then I think we have a modest amount of upside in terms of our profit margins as more award fee periods are completed and we start to build up a record of actual award fee scores moving through this year.

So far we just have one score. By the end of the year, we’ll have three or four. And so there may be a little bit of upside in our margins on that work. Probably won’t see those though until the second half of the year.

Gary Liebowitz - Wachovia Securities

Thanks. Also, J.R. mentioned the OBVs for the European GMD system. When would you expect to get that order? And when could that translate into revenues?

David W. Thompson

We received last year the contract addition from Boeing to carry out the development work on the two-stage configuration of OBV, which is the principal European interceptor configuration.

We are expecting that development work, which is ramping up now, to take place in 2008 and the first half of 2009, culminating in the late summer or early fall of next year in the first of several flight tests of the two-stage configuration.

Prior to that point, we would expect to receive at least an initial production order for those vehicles with deliveries beginning in 2011 and being completed in 2012. Although there is a good bit of noise that you have to separate from the signal here, it does appear that the logjam over the European site is breaking up in a favorable way.

If the agreements between the U.S. and Poland for the interceptors and the Czech Republic for the radars are completed by this summer, then we would expect to proceed with all of our work to develop test, build and deliver those systems over about the next three and a half years, maybe four years completing all of that activity by the early part of 2012.

Gary Liebowitz - Wachovia Securities

That’s very helpful. And one last one, how many TMS contracts remain at zero or lower margins? Or have we completed worked through those?

James R. Thompson


David W. Thompson

Yes, zero. We’ve finished up the last of the unprofitable or marginally profitable contracts, I believe it’s in the third quarter or early in the fourth quarter of last year. And so at this point all active TMS contracts are profitable.

Gary Liebowitz - Wachovia Securities

And your plans for that business, Dave?

David W. Thompson

I think we are still of the mind that at the right point, the business would find a stronger strategic fit as part of an enterprise that was focused on similar markets. So, at some point, hard to predict exactly when, I would expect we will divest that business.

We’ve been very pleased and quite proud of what the team at TMS has done over the last four years to turn the business around and to set in on a very solid growth path. Its performance now in just about every way that we look at it is quite good.

I think there is certainly more growth and more margin expansion to come. But to fully realize the potential of the business it is probably better that it be positioned in enterprise and focused on those sorts of markets and technologies and so at some point, we may divest it.

Gary Liebowitz - Wachovia Securities

Okay. Thank you very much.


Your next question comes from Patrick McCarthy - FBR Capital Markets.

Patrick McCarthy - FBR Capital Markets

Congratulations on the quarter and the year.

I was wondering, Dave, if you could talk about the Missile Defense Agency budget a little bit. Just going through, it looks like the scope of the late 2008 review for KEI, specifically, it’s going to increase beyond the booster, and now really look at the entire system.

I was just wondering if you could give us some insights onto why that change is occurring, what that all means, and what the impact is on Orbital?

David W. Thompson

Okay. I may not be able to give you a complete answer, yet. I’m looking into some aspects of your question myself. Let me start at the general level, and I’ll walk down to a little more specific discussion on KEI.

The overall budget request that just went over to Congress reflects about an 8% increase to the requested funding for MDA in 2009 compared to the actual budget in 2008.

While the GMD component is down a little bit, from what we can tell, our portion of it, which focuses on the interceptors is up. And so we’re pleased with that. KEI also seems to be slated for a good increase. I believe the request is up about 15% or 16% for 2009 compared to its actual funding allocations in 2008.

And then the third area within missile defense that is very important to us, the targets and testing accounts also are up, I believe, about 7% in 2009 over the 2008 level.

As we look out over the five-year period that the Defense budgets forecast, those three programs GMD, KEI and targets and testing, all together represent a little over $13 billion of projected spending through 2012.

GMD will continue to be the biggest contributor to that with somewhere in the neighborhood of 55% of the total. But KEI now is starting to come on stronger and it will be a little over 20% of the total with targets and testing representing the other 25% or so.

KEI is still kind of in the horserace with the airborne laser, both of which have important test events coming up over the next 12 to 15 months. And depending on how those tests go and other factors that Missile Defense Agency will consider, then one will probably do better than is currently planned and one will probably take a back seat.

So, we’re working hard with our team mates on KEI to make sure that our work is ready. The interceptor for the test launch is ready. We’ll be ready it looks like right now a little bit on the early side. We could probably carry out the test this fall. There have been a few delays in some other components of the KEI interceptors.

So right now, I believe the overall schedule has it in the first quarter, but we intend to be ready to support that test late this year. It will be a critical milestone. There is a lot of new technology that we’ve developed and that others have developed over the past few years. And so that’s really the focal point right now to do everything we can to make that successful.

Patrick McCarthy - FBR Capital Markets

Okay. Great. Can you also just talk about the Launch Vehicles business, just really focusing on Minotaur and Taurus? Those products you haven’t talked about in a while. What’s the environment like there for you?

David W. Thompson

The Minotaur family, both the Minotaur I that is operational today as a space launch vehicle and the still-in-development Minotaur IV Space Launch Vehicle have been strongly embraced by defense customers.

We are expecting to carry out the first Minotaur IV space launch at the end of this year, and then we have a busy schedule of Minotaur Is and IVs on the books for 2009 and 2010.

So, that part of the small space launch business is pretty robust right now, and should be a source of growth over the next couple of years.

On the other side, the civil and commercial Pegasus and Taurus vehicles are from a revenue standpoint relatively flat in 2008 compared to 2007. We do have a busy launch calendar ahead of us this year with two Pegasus launches in the first half of the year; a Taurus launch at the end of this year and another Taurus launch in the first quarter of 2009.

But after that there’ll probably be a year or two gap as we wait for these new science satellite programs that I referred to a little earlier to ramp up. Then we see a bit of resurgence in production and launch activity in the Pegasus and Taurus product lines beginning in the second half of 2010 and continuing from that point forward.

But from a financial standpoint, the influence of Minotaur will be stronger in 2008 and certainly in 2009 than it has been and the influence of Pegasus and Taurus a little weaker certainly in 2009 and probably to some extent in 2008 than they have been in that mix of small launch vehicles.

Patrick McCarthy - FBR Capital Markets

Okay. Thank you very much. And thanks for the detail.


Your next question comes from Troy Lahr - Stifel Nicolaus.

Hunter Keay – Stifel Nicolaus

Good morning. This is actually Hunter Keay calling in for Troy.

Just had a quick question for you on COTS. With the GEO, I think they denied RpK’s request a couple weeks ago. Did that officially free up NASA to now go ahead and award the actual $125 million demonstration contract and actually release the funds? Is there any of the legislation that’s out there that may get in the way of NASA going ahead and freeing up these funds?

David W. Thompson

My understanding is that NASA is now free to proceed with awarding another COTS contract and to funding it with the residual money left over from the RpK prior contract. So I think the hurdles have been cleared, at least that’s my understanding.

Hunter Keay – Stifel Nicolaus

Okay. Great. I’ll just assume for a second that you’re successful winning COTS, when that actual customer funding comes through, is this going to offset any of the potential $0.12 to $0.16 EPS impact that you’re going to spend on Taurus II in 2008 or is that more of a 2009 issue?

David W. Thompson

If we’re selected, and of course we don’t know NASA’s decision yet, so I don’t want to build up hopes, so I don’t think we ought to count on that just yet, then the funding would be available right away. It would be paid upon the accomplishment of discrete milestones over the next two and a half years or so.

If we were selected and we moved forward as proposed, then I don’t expect it would have a material impact on the EPS range that we quoted for Taurus II. But it could improve revenue and cash flow relative to what we’ve suggested.

So once we know the outcome of that, certainly if it’s favorable, we’ll provide more detailed guidance in terms of what it would look like to us this year, but it could have some positives on revenue and cash flow, but I don’t expect it to have a positive impact on EPS this year.

Hunter Keay – Stifel Nicolaus

Thanks a lot. I appreciate it.


Your final question comes from Michael French – Morgan Joseph.

Michael French – Morgan Joseph

Congratulations on a strong performance here. First question I have is on the cash. It’s starting to pile up and your buyback program looks like it has about $16.5 million left. And so even if you spent that money plus the Taurus II development, you still have a lot of cash left over. I’m wondering if you’re still thinking about acquisitions or other uses of that resource.

David W. Thompson

Yes, we are. We’ve tried to be very selective about strategic acquisitions. And we’re going to continue to be disciplined in terms of both the strategic fit and the valuation. It has been an area over the last year and it remains an area of a lot of activity. You certainly haven’t seen the results of that yet, but we’ve been quite busy evaluating possible transactions.

In addition, we have continued, although Garrett’s earlier numbers went through the end of 2007, we have continued in the first quarter of this year to execute stock buybacks. I expect that that will continue into the spring.

The Board will be reviewing a proposal for the next increment in our repurchase program at its regular meeting in April, and I would anticipate authority at that point for additional equity repurchases as well.

So, we are looking at the deployment of cash as a multi-pronged initiative with investments in R&D and capital to build our business, the largest of those of course being Taurus II, as the first prong, followed by strategic acquisitions and then with the stock buybacks continuing at a healthy pace over the next couple of years.

Michael French – Morgan Joseph

Okay. Thank you. Another one, there was a story in the press this week about the United States potentially having a third GMD site in Eastern Europe. Wasn’t clear whether they were talking about a radar site or a missile site.

If this is a missile site, do you think that would increase the opportunity for the two-stage vehicle, or would they likely just keep what they’re looking at now and spread it out?

David W. Thompson

I don’t know the answer to that question, Michael. I didn’t see the article that you’re referring to, so I can only speculate. I think the U.S. has had for a number of years a fallback plan in the event that the primary European site does not go forward in Poland.

There are a couple of other countries that have expressed interest in hosting that site should the arrangements with the Polish government not be finalized. I have not heard about any plans for deploying in two separate European sites, but it’s possible that somebody is thinking about that as well.

Michael French – Morgan Joseph

Okay. And lastly on the Taurus II, we saw, since your last quarter that ATK has talked about getting involved in that. Does that represent a competitive threat to you? Or since it’s not, I would call, a revolutionary kind of vehicle, does it look like something that would be priced out of the market?

David W. Thompson

I’m not overly concerned about potential competition from the ATK program. It’s my understanding and my belief that they have sized their vehicle to a larger capacity, it would probably compete more with Boeing and Lockheed Martin; now there is United Launch Alliance’s Atlas V and Delta IV. I do think from what I’ve read that it would represent a pretty expensive investment for development and production.

So I really don’t see it as a direct competitor to what we’re trying to do with Taurus II. I think that the existing or the incumbent Delta II rocket is probably a more significant competitor for us, especially since there are several unassigned launch vehicles in inventory, it appears that restarting Delta II production is probably not affordable.

But for a while, if we’re successful with Taurus II we may co-exist with some of the residual inventory units and there are a handful of those of the Delta II rocket. But it looks to me like the ATK vehicle is aimed at a larger segment of the market than what we’re interesting in.

Michael French – Morgan Joseph

Okay. Thank you very much, and good luck.

David W. Thompson

Thank you, Michael. And I think at this point, we’ll bring the discussion to a close. I want to thank everyone for joining us this morning. We look forward to talking with you in April with our first quarter financial results and at other opportunities between now and then. Thank you, again, and have a nice Valentine’s Day. Bye-bye.


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