Orbital Sciences "expects" to resume debt/stock buyback - but makes no firm commitment

By Paul Deckelman

New York, Oct. 20 - Orbital Sciences Corp. said Thursday that it anticipates continuing a previously announced program to repurchase up to $50 million of its common stock, debt, or some combination of the two - but executives of the Dulles, Va.-based rocket technology and communications satellite manufacturer offered no specific targets beyond that broad general goal, which they said could occur within "the next several quarters."

While the company's vice chairman and chief financial officer, Garrett E. Pierce, told investors and analysts on a conference call following the release of the company's third-quarter results that it expects to resume the repurchase activity, "in view of our current and projected cash balances and overall liquidity," he also said that at the same time, Orbital Sciences would "continue in parallel to pursue appropriate acquisition activities" - which might work against any debt or stock buybacks.

Pierce had noted that following the announcement earlier this year of the stock and/or debt repurchase program, Orbital Sciences actually bought back $20 million of it shares in the second quarter - but he said that there had been no securities repurchase activity of any kind in the just-ended third quarter, because the company had been "seriously considering several potential acquisitions."

Neither Pierce nor Orbital Sciences' chairman and chief executive officer, David W. Thompson, offered any details on the conference call as to the nature of the potential acquisitions or their likely price tag.

Thompson, however, also proclaimed that with Orbital Sciences having generated $10.5 million of free cash flow during the third quarter ended Sept. 30, and having a "healthy" unrestricted cash balance of $146 million as of the end of the quarter, and "since we continue to expect robust free cash flow in the fourth quarter, as well as throughout all of next year, we plan to be active in additional security repurchases, and, perhaps other strategic deployments of our capital over the coming few quarters."

Pierce said that the $10.4 million of third quarterly free cash flow included $2.8 million of capital expenditures, and he said that for the first nine months of the 2005 fiscal year, free cash flow had totaled $32.5 million, including $10.9 million of capex.

Ups cash flow forecast

The CFO projected that full-year free-cash flow would come in around $50 million to $55 million - a $10 million increase from the company's earlier predictions. The company expects roughly the same free cash flow in 2006.

It had announced in April that its board of directors had authorized the repurchase of up to $50 million of its outstanding securities over the next 12 months, and said that it had at that time $126 million of 9% senior notes due 2011 and 55.6 million shares of common stock. Also outstanding were 82,000 warrants, set to expire in August 2006, to purchase approximately 10 million shares of the common at an exercise price of $3.86 per share.

It said at that time that it might buy back stock from time to time in the open market, or via block purchase or negotiated transactions, while the warrants and notes might be purchased in negotiated transactions, all with the caveat that the timing, amount and type of securities to be repurchased would be determined "based on the company's loan covenants, market conditions and other factors."

Apart from the securities buyback plans, Orbital Sciences - which develops and manufactures small space and rocket systems for commercial, military and civil government customers, including communications satellites, missile defense systems used by the military as interceptor and target vehicles, and satellite-based transportation management systems for public transit agencies and private vehicle fleet operators - reported net income in the third quarter of $6.8 million (11 cents per diluted share), down from year-earlier net of $11.4 million (18 cents per share), although the latest figures were roughly comparable to the company's year-ago adjusted net income of $6.9 million (11 cents per share).

It posted quarterly revenues of $159.3 million, down from $171.7 million a year earlier, attributing the fall-off to "lower satellites and related space systems segment revenues related primarily to a decrease in the science, technology and defense satellites product line," because certain of its government contracts are "reaching the latter stages of production and are expected to be substantially complete by year-end."

That revenue drop was partially offset by higher communications satellites product line revenues.

Guidance below analyst consensus

Beyond its free cash flow estimates for the full year, Orbital Sciences projected full-year per-share earnings of 42 cents to 44 cents, on revenue of $690 million to $700 million. It said that for the full year 2006 it expects to earn between 50 and 55 cents a share on revenue of $750 million to $770 million.

However, that guidance comes in at less than what Wall Street is expecting. Analysts have been predicting full-year 2005 per-share earnings of around 45 cents, on revenues in the $719 million area, while they see 55 cents a share of profit in 2006 on about $775 million of revenues.

$1.2 billion backlog

Thompson, on the other hand, was relentlessly optimistic on the conference call, touting the company's $1.2 billion order backlog as of Sept. 30, and noting that new-business activity in the quarter was "one of the highest three-month periods for new orders" in the company's 23-year history.

In answer to an analyst's query during the question-and-answer segment of the conference call following the company's presentation, Thompson predicted that "right away, I think you're going to see a pretty significant pop in the fourth quarter and next year in satellite segment revenue," which he and Pierce indicated would become an increasingly important factor in company finances going forward - especially as older launch-vehicle (i.e. rocket programs) contracts from the government continue winding down.

He projects about 10% to 12% revenue growth from the satellite segment next year, a 5% to 6% growth rate for the launch vehicle segment, and an eye-popping 30% to 40% revenue growth in its transportation management systems business - although he acknowledged that the latter area represents only "a small part of our business" and is "not sustainable at that rate for a long time."

Opportunity in PanAmSat/Intelsat merger

The CEO also saw opportunity for Orbital Sciences in the recently announced planned acquisition of PanAmSat Holding Corp. - a long-time customer - by Intelsat Ltd, with whom Orbital has had only limited contact. Even so, he asserted, "we see it as a positive development for Orbital."

Over the past five years, "we've developed . . . and now it's run to a total of five satellites and hopefully will continue to grow from there, a very good relationship with PanAmSat," he said, "and their getting together with IntelSat certainly will open the door wider to us for future sales in the replacement market for the traditional IntelSat fleet."

Pro forma for the combination, which is expected to close within six months to a year of its August announcement, the combined company will have 53 communications satellites aloft.

While already serving PanAmSat - just this past Thursday, the European Space Agency launched an Orbital-built Galaxy 15 geosynchronous communications satellite into space for PanAmSat -

Orbital, Thompson added, has been "working with IntelSat for a couple of years, to make them familiar with the capabilities of our satellites and the process we use in designing and building them. I think this will accelerate our opportunities in a combined IntelSat/PanAmSat organization in the future."

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