Executives
Dave Thompson - Chairman & CEO
Garrett Pierce - Chief Financial Officer
J. R. Thompson - President, Vice Chairman, and Chief Operating Officer
Analysts
Patrick McCarthy - FBR Capital Markets
Howard Rubel - Jefferies & Co.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Gary Liebowitz - Wachovia Capital Markets, LLC
Chris Donaghey - SunTrust Robinson Humphrey
Michael French - Morgan Joseph & Co. Inc.
Orbital Sciences Corporation (ORB) Q1 2008 Earnings Call April 17, 2008 9:00 AM ET
Operator
Good morning. My name is [Janice] and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2008 financial results conference call. (Operator Instructions)
Mr. Thompson, you may begin your conference.
Dave Thompson
Thanks, Janice. Good morning everyone, and thank you for joining us today for Orbital's first quarter 2008 financial results discussion.
I'm Dave Thompson and with me this morning are J. R. Thompson and Garrett Pierce.
Before we get under way I'd like to ask everyone to take note of the safe harbor paragraph at the end of our financial release. This paragraph emphasizes the major uncertainties and risk in the forward-looking statements that we'll make this morning. Please keep these factors in mind as we discuss our future operational and financial plans and our guidance for the year during today's call.
We'll follow our customary outline for the call this morning. I'll begin by discussing some highlights from the first quarter and then turn it over to Garrett, who will cover the company's financial results in greater detail and also update our guidance for 2008 that we provided in February. After that J. R. will recap recent space missions and major systems deliveries. He will also provide a preview of upcoming launches, deliveries and other major operational events that we have planned over the next three months or so. Finally, I'll address recent new orders and contract backlog as well as our general business outlook for the next quarter or two, and then we'll open up the call for your questions.
To set the stage for today's discussion I'd like to begin by highlighting four areas in which Orbital's first quarter was particularly noteworthy. We will cover each of these topics in more depth later in the call.
First, though, from a financial standpoint, Orbital began 2008 with a very good first quarter. The company's revenues jumped 30% to $296 million. Our operating income rose 23% to $21.6 million despite a threefold increase in R&D spending in the quarter, and our earnings per share increased 21% to $0.23 per share in the March period. Free cash flow for the quarter was $17.8 million, which sets the stage for a stronger than expected year for cash flow in 2008, as we'll discuss momentarily.
Continuing the trend established last year, our Advanced Space Program segment led the way this quarter with about 175% revenue increase, and this was followed by our Launch Vehicle segment, which exhibited nearly a 20% revenue increase in the quarter.
On the profit margin side, both our Satellites and Space Systems segment and our Transportation Management Systems segment exhibited solid operating margin expansion compared to this time last year, with about 90 basis points and 280 basis point increases respectively in those two segments.
Garrett will give you all of the financial details on the first quarter and update our guidance for the full year in a few minutes.
Second, our operational activity in the first quarter was highlighted by one major satellite mission and, more recently after the end of the quarter, one space launch vehicle flight. As J. R. will describe, the company also delivered five other rockets, a satellite and space payloads in the quarter.
Looking ahead, we expect our operational pace to continue its increase in the months ahead with eight or nine space missions and major satellite and rocket deliveries planned over the course of the next three months.
Third, regarding new business activity, we started the year with an exceptionally strong quarter for new orders and option exercises with about $835 million in total new business activity booked in the first three months of 2008. This was made up of some $670 million in new firm and option contracts and $165 million in option exercises under previously awarded orders.
As I'll describe in more detail later, missile defense interceptors and target vehicles led the way in the first quarter. The company also benefited from good new order contributions from human space systems, communication satellites and space launch vehicles in the first three months of the year.
As a result of this excellent new business performance, our firm backlog increased 15% to about $2.2 billion and our total backlog also climbed 15% to approximately $4.3 billion at the end of the first quarter, both setting new records for the company.
Finally, we announced this morning an agreement to sell our TMS division to Affiliated Computer Services of Dallas, Texas. As we've said for several years, despite its improved financial performance and good growth and competitive prospects, TMS is a noncore business for Orbital. We believe that TMS' employees and customers would be even better off in another company where there is a stronger strategic fit with the overall enterprise. The agreement with ACS values our TMS division at $42.5 million, which is approximately 10 times its 2007 EBITDA. We expect the transaction to close late in the second quarter or early in the third quarter.
Now I'd like to ask Garrett to take you through the financial results from the first quarter, to discuss the TMS transaction in a little greater depth, and to update our guidance for 2008 that we last revised back in February.
Garrett?
Garrett Pierce
Thank you, Dave. Good morning.
Before commenting on the financial results, I'd like to note that during this call that 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. It will be posted under the Investor Relations heading on our website.
Revenue for the first quarter 2008 was at record levels, up 30% over the prior year first quarter. All business units had increases in revenues, but in particular the Advanced Space Program segment revenue was up 176% over the prior year, reflecting the growth in the Orion human spacecraft program.
Our Launch Systems segment also showed significant growth in revenues, up 19%.
Our operating margin was 7.3% in the first quarter of 2008 compared to 7.7% in 2007, however it should be noted that the first quarter 2008 operating margin includes the effect of Taurus II research and development expenditures. Excluding research and development expenditures not recovered under government contracts, our first quarter 2008 consolidated operating income was $23.9 million, or a margin of 8.1%.
We are currently forecasting the Taurus II research and development costs will reduce our full year 2008 operating income margin by about 120 basis points and reduce 2008 earnings per share by $0.12 to $0.16 per share as the program spend ramps up in the second half of the year. We believe this investment in the Taurus II product line will significantly expand our space launch vehicle market and provide significant revenue growth in future periods.
As stated previously, the first quarter of 2008 revenues in the Launch Services segment were up 19%. All three product lines - interceptors, space launch and target launch vehicles - reported growth year-over-year.
Segment operating income was essentially flat compared to the last year, the prior quarter in the last year. The current quarter's operating margin was 7.2% however, as previously mentioned, unrecovered research and development costs incurred in connection with Taurus II reduced LSG's operating income by $2.3 million.
Excluding these Taurus II costs, Launch System segment operating margin was 9.4% in the first quarter of 2008 as compared to 8.9% in the first quarter of 2007. This increase was primarily driven by the profit growth in our Missile Defense and Space Launch Vehicle programs. The margin in our interceptor product line was about 12% for the quarter, which is comparable to the first quarter of 2007.
Revenues in our Space Systems segment were up about $2 million year-over-year, attributable to an increase in the GEO satellite product line, which was up about 28% or $17 million. Revenues for certain science and technology satellites were lower in 2008. More importantly, the operating margin in this segment increased significantly to 7.4% in Q1 of 2008 as compared to 6.6% in Q1 2007. Once again, the principal driver of the improved margin is attributable to the GEO satellite programs, reflecting higher volumes and various cost improvement initiatives the company has in place and will continue to pursue.
Revenue in our Advanced Space Program segment was up 176%, entirely attributable to the Orion program. Operating income was $4.8 million for the quarter, up $2.7 million as a result of the higher revenue. The operating margin percentage decreased 130 basis points, reflecting the decision made in the second quarter of 2007 to lower our estimated contract profit margin in the early stages of the Orion program. We are currently about a year and a half into this eight-year program.
The Transportation Management Systems segment had a very strong quarter. Revenues were up about 20% and operating income margin increased from 6.6% in 2007 to 9.9% in the first quarter of 2008. As separated reported this morning, we have signed an agreement to sell our noncore Transportation Management Systems unit to Affiliated Computer Services for $42.5 million. We expect the transaction to close within the next 90 days.
The agreement to sell TMS is the result of a comprehensive process we ran through in the past few months. The sale of TMS allows Orbital to monetize the value of this unit for reinvestment in our core rocket and satellite product lines, which we believe will have ultimate higher returns. Upon closing of the sale, TMS' financial results will be reported as discontinued operations. The divestiture will not have a material affect on future operating results or earnings per share of the company.
Research and development for the quarter was about $9 million versus $2.9 million in the prior year, an increase of $6.1 million which was principally driven by the Taurus II program. Despite the fact that our bid and proposal expenses, which are SG&A expenses, were up about 60% reflecting the strength and the level of opportunities in the markets we serve, selling, general and administrative expenses as a percentage of revenue decreased to 7.4% compared to 8.6% in 2007.
Although our average cash investments were about $45 million higher, interest income for the quarter decreased to $1.9 million compared to interest income of $3.3 million in the first quarter of last year. The effective interest rate received has dropped about 280 basis points from about 5.9% o 3.1%, which reflects the capital market credit environment we are in right now.
For the first quarter of 2007 to the first quarter of 2008, the fed funds target rate has been cut 300 basis points, onemonth Treasury rates decreased 365 basis points and one-month LIBOR decreased 260 basis points. We expect this situation will continue for the balance of the year, and full year interest income for 2008 will be approximately $7.5 million compared to $12.8 million last year.
During the first quarter, Orbital purchased about 500,000 shares of its outstanding stock for $11.8 million. We have approximately $5 million remaining in our $50 million repurchase program authorized by the Board last April.
Since the inception of our buyback program in 2004, we have purchased 9.6 million shares at a total cost of $153 million at an average price of $15.99. These purchases have reduced diluted shares outstanding by approximately 14%. Our Board will consider the renewal and continuation of our stock buyback program later this month.
Free cash flow for the first quarter was strong at $17.8 million, including capital expenditures of $6.7 million, which reflects primarily the improved cash flow within our Satellite segment.
We are increasing our previous revenue guidance by $60 million to a range of $1.160 billion to $1.186 billion. This primarily reflects increases in the Orion program and increased bookings in the defense satellite programs.
We are also adjusting our operating margins to a range of 7% to 7.5% consistent with the higher revenues and improved product mix.
Finally, we are increasing our EPS guidance by $0.03 per share to a range of $0.84 to $0.89 per share.
We estimate that our full year tax provision will be 40.2%.
We are increasing our cash flow guidance by $40 million to a range of $80 to $85 million in recognition of the strong GEO satellite book of business, the addition of the COTS program, and increased revenue from various other programs.
We are estimating full year outstanding diluted shares at 60 million.
This has been a very busy and productive quarter for the company. As we look forward, we are optimistic about the results of the execution of our significant backlog, the prospects of the new product line for Taurus II, and the potential for the COTS program.
Dave, now back to you.
Dave Thompson
Thank you very much, Garrett.
Now I'd like to ask J. R. to update you on the company's major operational activities that took place in the first quarter and preview for you what we see ahead of us over the next three or four months.
J. R.?
J. R. Thompson
Thanks, Dave, and good morning.
The first quarter operational results were strong and reflective of good focused execution, with the highlights being six major system deliveries and capture of significant new business from a very diversified customer base.
One OBV interceptor was delivered to Boeing, two supersonic sea-skimming targets were delivered to the Navy, a Pegasus air launch rocket was delivered in preparation for launch of the Air Force's CNOFS - Communication/Navigation Outage Forecasting System - payload to space, which was successfully executed yesterday, delivery of the ORBCOMM payload, and completion of the SEPTA Transportation Management System project for Philadelphia.
I might add that yesterday's Pegasus mission was its 25th consecutive successful launch, with a successful string starting over a decade ago.
The THOR 5 GEO communications satellite was successfully launched from Baikonur on a Proton rocket early in the quarter and was delivered to the customer after several weeks of testing in early April. The THOR 5 satellite was the fourth GEO communications satellite delivered and launched in the last four months, with three more planned this year.
Development of the two-stage OBV interceptor is proceeding as planned. During the first quarter, Boeing completed authorization for full development of the interceptor in addition to ordering eight flight test articles. The production contract for 10 additional interceptors is expected later this year or early in 2009.
In addition, we received an award of a block buy for three Minotaur launch missions to support the Department of Defense Operationally Responsive Space Program. We have completed the critical design review for the kinetic energy interceptor boost vehicle design verification test, which is now scheduled for launch in April 2009.
The Missile Defense Agency continues to push for common avionics between the KEI and GMD interceptors. If there is a common solution - which we believe will happen - Orbital will likely be the developer and integrator of this work.
As mentioned earlier, this has been a particular busy period in our GEO communications satellite business unit, where we have nine satellites in some stage of fabrication with the recent order from SES Americom for a new satellite and an option order for Ka-band payloads for existing Americom satellites in production. Significant progress continues in development of the launch abort system for the Orion spacecraft. Several development motor firings at suppliers were conducted during the quarter, and system components began arriving at Dulles to begin integration testing supporting the pad abort test scheduled for this December at the White Sands Missile Range.
The Taurus II launch vehicle project team continues to make good progress toward a 2010 launch. Launch site selection for this first launch is planned for next month with primary candidates being Wallops Island and Cape Kennedy and should take approximately two years to complete construction. Both Florida and Virginia state governments are offering attractive incentives for this launch complex and could help minimize Orbital investment. Delivery of the first stage ground test article is planned for early 2010, and integrated system testing will be conducted at the selected launch site. With Orbital being selected for NASA's Commercial Orbital Transportation System - or COTS - space station cargo resupply demonstration will give us an opportunity to provide an early payload for a Taurus II launch in late 2010. Space station rendezvous and proximity operations will be the mission objectives of this early demonstration.
During the quarter we broke ground for the first of four new buildings at our Dulles campus and in early May are planning to occupy new office space in Arizona. To meet projected manpower needs, we continue to aggressively hire and train new employees at all locations. Over 150 new employees were hired during the first quarter, and we expect this hiring rate to continue throughout 2008.
Looking ahead, in the second quarter we're off to a good start with the successful launch earlier this week of the Pegasus rocket carrying the CNOFS payload to orbit from the L-1011 based out of Kwajalein. Later in the quarter we expect to launch a medium-range target for an operational exercise with a THAAD interceptor and launch the AMC21 GEO communications satellite that we had built for SES Americom. ORBCOMM is planning to launch five of the Orbital-built payloads delivered last year. Thirteen major system deliveries are also planned for the quarter. In addition to the THOR 5 GEO communications satellite delivered earlier this month, we plan to deliver two more GEOs in May - MEASAT AND AMC-21 - the IBEX NASA science and technology satellite in late April, four targets, one OBV interceptor for flight test, the Pegasus rocket for the IBEX mission, and three Transportation Management System project completions.
And now I'll return the discussion to Dave.
Dave Thompson
Thank you, J. R.
I'll now report in a little more detail on our first quarter new orders and contract backlog and also talk about our overall market outlook and in particular our prospects on the Taurus II launch vehicle for the rest of the year.
With $835 million in total new business volume in the first quarter, Orbital recorded one of our highest threemonth booking totals ever. The company was awarded about $245 million in new firm orders and $425 million in new option orders in the first three months of the year, and during that same time we also received $165 million worth of option exercises under previously awarded contracts dating back to last year and prior periods.
As I mentioned earlier, our Launch Vehicle segment led the way in the quarter with approximately $485 million of our total new business activity. This was followed by our Advanced Space Program segment with some $220 million of new business, our Satellites and Space Systems segment with about $115 million of new business, and finally our TMS segment with about $15 million in new bookings in the first quarter.
New orders in the March quarter included three large bookings which together totaled some $530 million - first, approximately a $210 million addition to our GMD interceptor rocket contract with Boeing for the Missile Defense Agency which J. R. discussed a few minutes ago; second, a $170 million agreement from NASA for the COTS demonstration program; and third, a $150 million contract award for target rockets from the U.S. Air Force.
In addition to these three large orders, we also received a new geosynchronous satellite option exercise from SES Americom, an option exercise for three Minotaur space launch vehicles from the Air Force, and a smaller new target vehicle contract from the U.S. Army which together added about $190 million to our total backlog.
About 10 other smaller orders and existing option exercises which together totaled slightly over $100 million rounded out an excellent quarter for the company for new business acquisition.
Putting these new order results in unit terms is equally impressive. We received firm or option orders or preexisting option exercises for 28 launch vehicles, three satellites and one TMS project in the first quarter.
Looking ahead to the next six months, Orbital's new business opportunities continue to be very robust. We currently have over $350 million of proposals that are under evaluation by customers and we expect to submit additional bids totaling a comparable or greater value over the next several months. In addition to these, so far this quarter we have received about $100 million in new government contract awards and expect to be selected in the near future for our second commercial geosynchronous communications satellite order of the year. Based on this level of new business activity, I believe Orbital will continue to build our backlog over the next six months, with our strongest markets for new orders during that time likely being commercial communication satellites, space launch vehicles, and defense and scientific satellites.
Finally, I'd like to update you on our Taurus II launch vehicle development work and our market outlook for this important new product for the company. With NASA's award of a COTS demonstration contract to Orbital two months ago in February - which, as J. R. mentioned, will use one of the early Taurus II rockets for its launch the company accelerated our final gono go decision that we had originally expected to make this coming September. So we are now fully committed to funding the remaining development and capital expenditures over the next two and a fraction years to bring the Taurus II rocket into service by the second half of 2010.
In addition, assuming that we carry out a successful COTS demonstration mission for NASA, then I think we have the realistic prospect of launching several operational international space station cargo missions each year beginning in 2011. Therefore we are increasing our annual production and flight rate and revenue outlook for Taurus II from the previous average of something like three rockets a year generating roughly $200 million in annual revenue to now four or five rockets a year yielding $300 million or more in annual revenues by the 2012 to 2013 period. Of course, there are also likely to be additional spacecraft sales for our new Cygnus platform for each of the operational COTS missions, which would substantially increase the company's satellite revenues during this period as well.
So while we still have a lot of hard work and substantial R&D and capital investments ahead of us over the next several years, we are all very excited about the market reception that Taurus II has received so far and the strong financial outlook that we have for this important new product line for the company.
To wrap up, Orbital's first quarter was a very good one in all major respects. Our new business volume was outstanding, our operational performance was once again very solid, and our financial results were strong. In addition, our agreement to sell the company's TMS division completes the final step in our strategic refocusing campaign that started early in the decade. As always, strategic and execution challenges remain in our business, but I am optimistic that 2008 is going to be a great year for the company and for our shareholders.
Thanks for you attention. We are now ready to open up the call for your questions.
Questions-and-Answer Session
Operator
Thank you, sir. (Operator Instructions) Your first question comes from the line of Patrick McCarthy with FBR Capital Markets.
Patrick McCarthy - FBR Capital Markets
Hi. Good morning, and congratulations on another great quarter.
I was wondering if you'd take just a couple of minutes and walk through Taurus II from the perspective of what are the significant technical risks that you think you need to overcome over the next several years as you develop that program and how are you trying to manage them?
Dave Thompson
Good morning, Patrick. Sure, I'll - let me start on that one, and J. R. may want to add his perspective as well.
First of all, in order to reduce technical risk and to minimize and better control our development costs and our development time schedule, we are using to the maximum extent we can subsytems, components and design and production approaches borrowed directly from the company's other space launch and interceptor rockets.
However, Taurus II does present us with several new technical challenges that we're very focused on. Those tend to be centered on the first stage of the three-stage rocket and involve both the main engines that are being provided to us by Aerojet and the structure and tankage for the first stage being developed and built by Yuzhnoye and Yuzhmash in the Ukraine. There are also very important technical aspects to the interface between the first stage and the engines that have to be carefully considered and monitored.
So from an overall risk standpoint, the number one and two items on our list of things to pay the highest attention to are the main engines and the first stage and the interaction of those two. Following that and also interacting with those items are the ground facilities and infrastructure at the launch site that we will select, as J. R. indicated, within the next month.
In terms of our approaches to risk mitigation, first of all by selecting the Aerojet engines which have a substantial amount of developmental and test history to them - we're, although not eliminating, we're minimizing the risk of introducing a new engine into this program, and by working with our partners in the Ukraine who have 50 years of experience with similar systems dating back to the earliest days of the then-Soviet Union's ICBM and space launch programs are among the most capable organizations in the world for building systems of this class. They currently produce the Zenit sea launch and its corresponding land-launched configurations for launching bigger satellites, and we are relying on that design and production experience to the maximum extent we can.
In addition, the launch site selection - which, as J. R. indicated is coming down to in a way a very difficult decision, but that's good because both the Virginia site at Wallops Island and the Florida site at Cape Canaveral have put forward very aggressive and attractive proposals to us - will ultimately result in working with either the Air Force's most active launch site at Cape Canaveral or one of NASA's most capable teams at Wallops Island.
So those are both the main challenges and the main mitigation steps we're taking to address those.
J. R., would you like to add to that?
J. R. Thompson
No, I think I can't substantially add to that. There is no new propulsion technology in this, as Dave indicated. The heritage of these Russian engines go back a long way, and of course the first stage is being developed by an outstanding team over in the Ukraine.
It is going to require all of our people to pay an awful lot of attention to detail as we integrate here these systems, one from offshore and one from the West Coast. And also I think it's going to be important to execute properly the ground testing of this integration, and we plan to do that at the launch site itself and not invest a lot of capital in test stands across the country.
So I think we've put a lot of thought into this. The execution now is going to be key to it, but I think we're quite confident with the team that we have in place that we can do it.
Patrick McCarthy - FBR Capital Markets
Okay, great. Thanks for the detail.
My second question is on the cash flow side. Obviously with the sale of TMS and then the increase in cash flow expectations for the year you're going to end this year with a ton of cash. It seemed as though Taurus II was going to be the biggest cash consumer, maybe not so now. Could you just reprioritize what your thoughts are on how you're going to spend your cash?
Dave Thompson
Sure, Patrick. I think we will continue to pursue our three-pronged cash deployment plan even though we'll now have a little more cash than we expected to deploy consistent with the plan - first, internal research and development and capital investments to support not only the Taurus II development program but the general growth of our business; second, although we don't have anything to announce on this front today or in the near term, strategic acquisitions; and third, additional share repurchases. As Garrett indicated, we've been fairly active with buybacks over the past three or four years, and I expect that we will continue to be deploying some cash and helping ourselves and our shareholders in that third area.
With regard to our improved cash flow outlook this year, that comes as something of a pleasant surprise as a result of several favorable developments over the past three months or so. Those include the stronger than expected new order flow in the first three or four months of the year, some positive effects of the COTS demonstration program, and some improvements in the cash consumption on the Taurus II side as a result of a number of positive developments both on the R&D side and the capital expenditure side of the Taurus II work.
Patrick McCarthy - FBR Capital Markets
Okay, great. And then, sorry, my final question: You may have mentioned this but normally you give kind of an expectation for orders for the full year and if you did, I did not hear that.
Dave Thompson
I did not. You didn't miss it. I didn't provide that. Our overall outlook is slightly better now than it was last time, and we're looking for year end firm backlog in the range of probably $2.2 to $2.3 billion, which I believe is up about $100 million from prior guidance.
Patrick McCarthy - FBR Capital Markets
Thank you very much.
Dave Thompson
Okay. Thank you, Patrick.
Operator
Your next question comes from the line of Howard Rubel with Jefferies.
Howard Rubel - Jefferies & Co.
Thank you very much.
First, just to go to TMS, Garrett, very quickly, you said it's not material, the contribution, yet I kind of backed out the contribution and looked at the potential interest income you might earn. It looks like it's a couple of pennies a share. I mean, that's what you mean by not material?
Garrett Pierce
Yeah. Yes, Howard, that's correct. But remember, the financial business model for TMS is different than our core business in terms of how they operate in the state and local environment. And so we believe that beyond EPS return on invested capital - that the proceeds can be put back into our business and enjoy higher returns than we would have seen at TMS.
Howard Rubel - Jefferies & Co.
Just to follow on that, I kind of made some assumptions. It looks to me like the equity invested in that business is in the $10 to $15 million range. Is that pretty fair?
Garrett Pierce
Yes.
Howard Rubel - Jefferies & Co.
And so you'll have a reasonable gain, but that should all be shielded because of the, well, not the NOL but you still have some capital NOL, if that's the right words to use?
Garrett Pierce
You're correct on both counts, yes.
Howard Rubel - Jefferies & Co.
And then second, you talked about Taurus building in terms of I'll call it R&D requirements for the rest of the year, and yet when I look at sort of the metrics that you gave us it looked like it was $0.02 to $0.03 already in the current quarter. And so you're maybe a quarter away from what the likely run rate on the program's going to be, is that fair?
Garrett Pierce
I would say the guidance we gave last quarter where we said it should have about $0.04 to $0.06 in the first half still stands. So it will ramp up more in the second half, Howard. So if you take the $0.12 to $0.16 range you had and kind of gee that up next to the guidance we gave last quarter, it still stands now. That's how we look at it.
Howard Rubel - Jefferies & Co.
Okay.
Garrett Pierce
So we do expect the P&L impact to be a little heavier in the second half as the program ramps up than in the first half.
Howard Rubel - Jefferies & Co.
And I appreciate that that's very fair. I just wanted to, because it's - but once you're sort of there, the second half's pretty much the run rate that you do expect going forward? There's nothing that you've seen on the horizon, Dave, that would cause you to change that?
Dave Thompson
No. In fact, at the present time our outlook for the P&L impact next year is a little more moderate, a little lower than it had been previously. So at present the second half of this year appears to be the heaviest, from an R&D standpoint, the heaviest period of investment and the strongest headwind on earnings throughout the program. There will still be headwind next year, but it looks like it'll be a little more moderate than this year and certainly more moderate than just doubling the second half of this year.
Howard Rubel - Jefferies & Co.
Just two more things - and maybe I didn't catch this right - but your expectations that the outlook is a little bit better for the business by changing the market size, does that mean we're close to seeing another order for I'll call it the COTS vehicle or the Taurus II vehicle?
Dave Thompson
I don't think we're going to see another order over the course of the second quarter, but I do think in the second half of the year we have several strong opportunities to book additional Taurus II orders. One of those would be with NASA in the follow-on contract for operational space station cargo missions. Another may be in the defense market.
So I do not anticipate much news on the Taurus II new order front in the second quarter, but we're hopeful in the second half we will have some good progress to report.
Howard Rubel - Jefferies & Co.
I'll let it go. Thank you.
Dave Thompson
Thanks, Howard.
Operator
Your next question comes from the line of Troy Lahr with Stifel Nicolaus.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Thanks. Can you guys maybe break down a little bit how you see Taurus II split between Launch Vehicles and Advanced Space Programs, and also how the R&D impact is going to be going forward? It seems like Advanced Space Programs doesn't have much of an R&D impact but Launch Vehicles could. Is that the way I should think about it?
Dave Thompson
Yes, Troy, that's correct.
The Taurus II program is being carried out jointly between the Advanced Space Programs and the Launch Vehicle segments in our company. The Advanced Programs group is responsible for leading the Taurus II development program and also for implementing the other elements of the COTS demonstration project with NASA, specifically the Cygnus spacecraft and its cargo modules and mission operations. So APG or Advanced Programs is focused on - is fully responsible for Cygnus and has significant responsibilities for Taurus II.
The Launch Vehicles group is focused quite heavily on Taurus II, and from an R&D investment standpoint, it turns out there's approximately a 30-70 split of the R&D costs between Advanced Programs and Launch Vehicles. So Launch Vehicles carries a heavier part of the R&D work than Advanced Programs does given the work split and the various allocations in the program.
Troy Lahr - Stifel Nicolaus & Company, Inc.
And is it that Advanced Space Programs is able to offset or I guess recover more of that R&D? Is that the case also?
Dave Thompson
No, I think their recoveries in percentage terms are probably comparable. It really just comes down to the work that's being done by the two groups, the manpower involved, the other costs that are incurred that lead, at least to first order, to this 70-30 split of the R&D investments between Advanced Programs and Launch Vehicles.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Okay. And why only one OBV in the quarter? Is that just a timing issue or have you slowed down that a little bit there?
Dave Thompson
It has to do primarily with they're not being - we've intentionally slowed down the deliveries, not really the work in the program but the final handover of the vehicles to Boeing in part because during the winter season it's difficult to deliver the vehicles and install them in the silos in Alaska.
J. R. Thompson
In addition to that, Boeing has directed us to start refurbishing some of the units in the field, so there's been a shift of priority.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Okay. Can you maybe say how much OBV revenue you have now or can you maybe quantify that a little bit? Are you still on track for 10 a year also?
Dave Thompson
Yeah. I tell you, let me answer the second half of that question first and we'll see if we can get you a quantitative answer to the first part in just a minute.
We expect for the year to sustain about the same number of deliveries as last year, nine or 10 vehicles this year. And in fact, based on the new OBVs that we're moving out on now - which are going to cover the flight test program in the period 2010 through 2013 - and then, as J. R. mentioned, additional orders that we anticipate very late this year or early next year, it appears that we will be building and delivering approximately 10 OBVs each year over the next five years. There may be a year or two in there where it's eight and another year where it's 11, but approximately 50 OBVs are expected to be built and delivered over the five-year period 2008 through 2012.
Now with regard to, let's see, the first part of the question - I'm looking at some numbers here to try to give you the answers to that - in general, Troy, it looks like our interceptor product line within the Launch Vehicle segment is anticipated to grow just under 10% this year from about $205 million in revenue last year to somewhere between $220 and $225 million in revenue this year, and its first quarter contribution was in the neighborhood of $55 million. That's a combination of OBV for the GMD program and KEI for that program, and I don't immediately have the breakdown between those two. But interceptors together were about $55 million in revenue in the first quarter.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Okay, thanks. And just lastly, then, can you maybe describe a little bit about the increase in guidance? I mean, it looks like you added $60 million. I mean, I would think that that could account for almost maybe the $0.03 increase, but then again you also have higher margins. So I'm just trying to figure out how you break down that $0.03 increase in higher guidance for EPS.
Dave Thompson
Let's see. Good question.
Garrett Pierce
Well, Troy, it's Garrett. As we said in my script, it's being driven by higher revenue in the Orion product line and also some bookings and revenue in the defense satellite area and the GEO satellite area. So you take all three of those, and with the ramp up in the GEO satellite returns on sales, that all drops through to the $0.03 that we've given you guidance for.
Dave Thompson
I would just add, Troy, to that to the extent that probably somewhere between a third and a half of the $60 million revenue increase is attributable to our human space flight work, primarily on the Orion program, since we are still relatively early in that project we are approving profit rates at below our current average. And so that contribution to the revenue increase for the year does not particularly help the margins for the year.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Okay. Sounds good. Thanks, guys.
Dave Thompson
Okay. Oh, by the way, just to your earlier - to the part of the question I could not answer earlier, Troy, the approximate revenue split between the GMD interceptors that we call OBVs and KEI is roughly 75-25.
Operator
Your next question comes from the line of Gary Liebowitz with Wachovia.
Gary Liebowitz - Wachovia Capital Markets, LLC
Good morning, gentlemen.
Dave Thompson
Hi, Gary.
Gary Liebowitz - Wachovia Capital Markets, LLC
Dave, has there been any change relative to three months ago with respect to your market outlook for the commercial satellites and government satellites in terms of total market, addressable market and target market shares?
Dave Thompson
Nothing dramatic has changed over that period. Let me comment on the two parts separately, Gary.
On the commercial satellite side, we began the year expecting between 20 and 22 new commercial satellite orders with six to eight of those being in the class that we address, the small class. We might be just a little more bullish right now based on what's taken place so far this year. Through April by our count there have been nine GEO satellites ordered. Seven of those have been announced. Two - one of which we're involved in - have not yet been announced. And of the nine orders that have been placed through this month, four of those have been in the small class and we've been selected for two of those four.
So since we were originally targeting a baseline of three with an upside of four orders for us this year, I'm at least comfortable if not slightly more bullish than I was at the outset of the year about how we will do this year and probably a little bit more bullish for total demand.
But nothing dramatic. We might have a little better shot right now at four orders. We're certainly confident of three orders, which was our original plan.
With respect to the government market, the military side is looking very good to us. One of the significant contributions to new orders since the quarter ended just in the last couple of weeks for us has been a military satellite project. We also announced both late last year and earlier this year several new Air Force and DARPA satellite contracts that were not in and of themselves particularly large, but if we do a good job could lead to bigger things over the next two or three years.
So for us, the defense satellite outlook is very solid, and I think that area will be a good contributor to revenue growth and to new orders for the remainder of this year.
The science satellite market continues to have less clarity for the near term. On the positive side, when NASA sent its 2009 budget to Congress back in February, that budget request included two new programs for earth science satellites and three new small space science satellites. It however remains to be seen whether, when the budget finally comes out of Congress late this year, all of those will be preserved.
But I think the longer term outlook in the scientific area remains positive. The near term is less clear, and we do not expect science satellites to be a major contributor to new orders in the next couple of quarters. And in fact, we think from a revenue standpoint that will be the one product line that will have a down year in 2008 relative to last year.
Gary Liebowitz - Wachovia Capital Markets, LLC
Okay, great. And then two quick ones for Garrett. Garrett, the margin performance in the satellite business, was it all performance, cost performance, in pricing and there weren't any unusual one-time accruals?
Garrett Pierce
There were not any unusual accruals, onetime accruals. It was the performance of the business as it's being operated.
Gary Liebowitz - Wachovia Capital Markets, LLC
Okay. Also, can you just give us an update on the auction rate securities, if there have been any more temporary impairments and what your expectations there are?
Garrett Pierce
Yeah, I can. Let me give you a little - as you're familiar with this - a little backdrop on the area of auction rate securities, at least at Orbital Sciences Corporation.
As of the end of the quarter, Orbital had about $280 million of cash investments. As you're aware, due to liquidity disruptions in the capital markets and the continuing credit market turmoil, about $35 million of our total cash investments that are held in auction rate securities are currently illiquid.
We took a non-cash charge, a temporary impairment charge, to reflect the estimated fair value in the fourth quarter 2007 of $6.5 million. There has still, as you're well aware, been turmoil in that market, particularly in February, and the first quarter we took an additional charge of $2.5 million, again, a noncash temporary impairment charge to the balance sheet as a reduction in fair value.
Given our sizeable cash balances, as you are all aware of, and our strong free cash flow forecast for this year, we're really not under any pressure to liquidate these securities. In December, we reclassified the auction rate securities as noncurrent investments. It's our expectation over time that we'll be able to liquidate these investments at par, thus avoiding any real economic loss.
In the interim, by the way, these securities are currently earning interest of approximately 4.2% versus a 30day Treasury bill rate of about 1%. So we are enjoying the returns. We do not need to monetize the cash right now, and we'll see how things go.
Gary Liebowitz - Wachovia Capital Markets, LLC
Okay. Thanks for the update.
Garrett Pierce
You're welcome.
Operator
Your next question comes from the line of Chris Donaghey with SunTrust Robinson.
Chris Donaghey - SunTrust Robinson Humphrey
Hi. Good morning, Dave. A great quarter.
Dave Thompson
Oh, thanks, Chris. Good morning.
Chris Donaghey - SunTrust Robinson Humphrey
Good morning. Advanced Space Program's sequential increase of about $18 million, how should we think about that business on a run rate going throughout the rest of 2008 and then, maybe as a related question, just in general segment outlook given the new revenue guidance and the strength in the ASP division?
Dave Thompson
Okay. I think for the full year driven by both the human space programs area, which include Orion and COTS, and a big portion of the military satellite work, which falls into Advanced Space Programs - although some of it, based on mission area, is in Satellites and Space Systems, the larger part is in Advanced Space Programs - that the first quarter run rate of a little over $70 million, $72 - $73 million, is probably a fairly - I don't think we'll see significant growth quarter-over-quarter as we go through the year. There'll be a mix change as I think, for instance, Orion right now is really at its peak period in terms of all the work we're doing. Some of the other things are going to - as it drops a little bit later in the year, some of the other areas will pick up.
So for the full year, I would expect we'd be in the range of, let's say, $260 to $270 million in revenue. So I guess if we kind of annualized the $70 or $72, it's probably going to be fairly stable, maybe up a little bit in some quarters, down a little bit in others.
Is that -
Chris Donaghey - SunTrust Robinson Humphrey
Right. So that answers the question for Advanced Space Programs. So then, in Launch Vehicles and Satellites and Space Systems?
Dave Thompson
Yeah. Let me try to give you a little more complete picture.
Taking the segments in turn, beginning with Launch Vehicles - and these will be fairly round numbers - but we expect about 10% revenue growth this year compared to last year in our Launch Vehicles segment. The Advanced Space Program segment comparing this year to last year will probably generate in the vicinity of 50% revenue growth. Satellites and Space Systems, due to the relative weakness of the science satellite product line, will probably be down a bit, 5%, maybe a little more compared to last year. And although we may not see the effect for the whole year, our TMS segment will probably be up on the order of 20% on a revenue basis this year compared to last year.
So that's the outlook right now from the four segments for revenue growth in '08 compared to '07.
Chris Donaghey - SunTrust Robinson Humphrey
Okay, great. Thanks, Dave. And just real quick on the operational responsive space order that was announced a few days ago, in the press release you said that this is the first real order under that program. Can you talk about maybe what's going on in the payload side now that we have the first major launch vehicle contract placed?
Dave Thompson
The work up until now over the last three or four years has been of an experimental nature with a series of five satellites that are referred to in the industry as tactical satellites or TacSats. And we built one of those and we contributed in major ways to several of the others, so we've been involved in three of the five experimental TacSats.
We also have launched or will launch I think at least four of the five on Minotaur rockets, so we've been quite involved in the preliminaries leading up to a point where the Air Force and other military customers can start focusing on operational systems as opposed to research and development and technology demonstrators, which essentially has been the purpose of the TacSat series.
This new order for several Minotaurs will help kick off the next phase of the operational responsive space program to actually go beyond just demonstrating technology to the point of building satellites that can be put together and launched and activated quickly to support a variety of military functions ranging from regional communications and missile warning to various sorts of intelligence and surveillance purposes.
The early decisions on exactly what missions the operational ORS satellites are going to fulfill and who's going to be involved in building them have not yet been made, but we are active in pursuit of some of the satellite opportunities as well as the launch vehicle contribution to those programs.
Chris Donaghey - SunTrust Robinson Humphrey
Okay, great. Thanks, Dave, and again, good quarter.
Dave Thompson
Okay. Thank you, Chris.
Operator
And your last question comes from the line of Michael French with Morgan Joseph.
Michael French - Morgan Joseph & Co. Inc.
Congratulations on a great quarter.
Dave Thompson
Thanks, Mike.
Michael French - Morgan Joseph & Co. Inc.
First question - on the OBVs, you're expecting 10 more to be ordered from Boeing at the end of this year, early next year. Just wondering what has to happen in order for that order to be made?
Dave Thompson
Well, yeah, good point.
I would just, probably being a little more conservative, look for those orders in the early part of next year instead of late this year although this year remains a possibility.
Those 10 additional orders, whenever they occur, would represent the first production units under the twostage variant of the OBV that J. R. talked about, so we are now under way with full power developing and preparing to flight test the twostage OBV that would be deployed in Europe and also in some of the U.S. locations. But we are not under contract to produce in quantity the two-stage vehicle.
So I think the two things that need to happen to realize the 10 additional orders would be this: First, we have to continue to make good progress in the two-stage development program, which I'm very confident that we will do, and second, MDA would need to make the decision to order at least the first production batch of the twostage vehicles with confidence that the final agreements in Europe are either in hand or soon would be or that, in the absence of those agreements, that the two-stage vehicles would have a place in the U.S. inventory.
So those are the two major hurdles still ahead. We'll update you as time goes by, but I would recommend you think about the timing of the next batch of 10 - or the first batch of 10 two-stage vehicles being ordered in the winter or spring period in 2009 as opposed to the fall of 2008.
Michael French - Morgan Joseph & Co. Inc.
Okay. Thank you. That was helpful.
Now I guess a strategy question. You talked a little bit about acquisitions when you were asked about the cash, but as you pointed out, the interest rates aren't really providing much help and there are some strategic areas where an acquisition would make sense. It didn't sound like there's anything imminent, and I was just curious because I know this is something you've been working on for awhile. Is the acquisition environment getting more difficult because of what's going on in the credit markets or less so because you obviously could do a pretty significant deal without borrowing any money?
Dave Thompson
Well, you point out several good factors to consider, Mike.
On the positive side, we may see pricing for some of the smaller acquisitions that could make sense for us come down a bit. Pricing for smaller companies in a couple of the market areas where we're interested, particularly in the military and intelligence satellite field, has been pretty robust, pretty full, over the last couple of years. In fact, we've even seen a couple of transactions carried out by financial buyers at values that were somewhat surprisingly high to us. We probably won't see as much financial activity in the near future as we've seen recently.
But I guess we - and you're also correct that the yield on our cash balances now is not as attractive as it was last year but we're still going to be disciplined about this and not jump into something that doesn't make a good strategic fit or that we don't understand or where we feel like the valuations are not going to be positive to the company and our shareholders.
I can tell you, though, it's an area we continue to put a fair amount of effort into. But I think you are right, we don't anticipate anything, any developments that are likely to be imminent in this area over the course of the next few months.
Michael French - Morgan Joseph & Co. Inc.
Okay. Well, thank you and good luck.
Dave Thompson
Okay. Well, thanks to all of you. I believe at this point we'll bring the discussion to a close. I thank you again for joining us this morning, and I look forward to seeing many of you at our annual shareholders meeting, which is set for this time next week.
Thank you all very much, and good morning.
Operator
Ladies and gentlemen, this concludes today's conference.
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