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Remi Cossart

ORB AT A GLANCE

P/E ► 20.2 HIGH EV/EBITDA ► 16.7 AVG ROA ► 5% AVG ROE ► 7.7% AVG Debt to Equity ► 0.876 AVG Current Ratio ► 2.18 AVG Interest Coverage Ratio ► 6.93 AVG

 

 

 

 

 

 

Orbital Sciences Corporation (NYSE: ORB): manufactures small rockets and satellites for commercial and governmental use. 65% of the company's total revenue comes from US government contracts mostly with NASA and the Department of Defense.^[1] Orbital also puts satellites for direct television and cable into orbit and establishes networks necessary to operate satellites and space vehicles from earth.^[2] Orbital Sciences' revenue grew by 35% in 2007.^[3] This growth was primarily from the Advanced Space Programs, whose revenue increased by $124.1 million, 243% revenue, largely from winning a $57 million contract with NASA to build part of the Orion human spacecraft in 2007.^[4] However, NASA's funding has decreased since 2006, which will lead to less contracts to Orbital Sciences.^[5]

However, Orbital is involved with mostly long-term contracts which require the company's satellites to remain in working condition for up to 15 years. As of 2007, over $47 million of its revenue was contingent on the continuing success of these contracts.^[3] Orbital also faces inherent risk in space flight. 91.1% of all space launches are successful,^[6] and a rocket failure will bring bad press and less contracts to Orbital Sciences.

Business Overview

Orbital's total revenue increased by 35% from 2006 to 2007. This substantial rise is caused primarily from a 243% increase in revenue from the Advanced Space Programs segment which has increased activity mostly from the Orion spacecraft contract. The Orion spacecraft contract, awarded in 2007, is worth $57 million and puts the segment in charge of testing the abort system for the new craft.^[3][4]

2007 Revenue Breakdown by Segments ^[3]

Revenue Breakdown by Geography ^[7]

Business Segments

• Launch Vehicles (36% of revenue, 46% of operating income)^[3] are rocket boosters used to launch objects into space. Orbital makes three types of launch vehicles: interceptor, target, and space. Interceptor Launch Vehicles launch "kill vehicles" used to destroy ballistic missiles, and Orbital is the only supplier of interceptor boosters to the US Missile Defense Agency.^[8] Target Launch Vehicles are rockets that the US military uses to test and simulate ballistic missile attacks. Space Launch Vehicles are rockets used to put satellites weighing up to 4,000lbs in low Earth orbits. These launch vehicles are used by government, commercial, and military customers.^[8]

• Satellites and Space Systems (43% of revenue, 36% of operating income)^[3] are communication satellites in geosynchronous-Earth orbits (GEO) that are used for cable and direct television services. It also makes satellites for low-Earth orbits (LEO) used by science organizations to conduct interplanetary or deep-space exploration missions. This segment provides the network and infrastructure necessary to handle data and control the actions and position of the satellites.^[2]

• Advanced Space Programs (16% of revenue, 14% of operating income):^[3] develops satellite launches requiring advanced technical expertise, including those with humans onboard. This segment was chosen by NASA to design the abort system that will let astronauts escape the Orion spacecraft, the shuttle that is planned to replace the existing Space Shuttle, in the event of a failure. The segment is also involved in the research and development of reusable launch vehicles.^[9]

• Transportation Management Systems (5% of revenue, 4% of operating income):^[3] include satellites used to help large metropolitan areas manage mass transit operations. This system has been used in large cities like Los Angeles, Washington D.C., and Singapore.^[10]

Trends and Forces

Declining US space spending puts pressure on Orbital's business

In 2007, 65% of the of the company's total revenue was from US contracts. ^[1] These contracts are funded by yearly budgets voted by Congress. In 2009, the White House requested 6.4%, or $264.7 million, less than the previous year for NASA's budget.^[5] The US Defense Budget's spending on Advanced Spacecraft Technology also fell by 22.4% from 2007 to 2008.^[11] Nearly all of Orbital's contracts with the US government are through NASA or the US Department of Defense. If these budgets decline, Orbital's revenue will follow. These changes however, are on a year to year basis, and are heavily effected by Congress and the President.^[12]

Long term contracts add risk to the company's performance

According to many of the Orbital's satellite contracts, the company does not receive performance-based payments until the satellite has remained in orbit with minimal problems for long periods of time, sometimes up to 15 years.^[13] Approximately $43 million of the 2007 revenue are tied into these types of contracts.^[14] 12% of Orbital's revenue from US government contracts comes from fixed-price contracts.^[15] These contracts give the company a set amount of money for the completion of the project. The company's profit margins rise if costs are lower than expected or fall if costs are higher.^[16] Rising steel and energy costs put pressure on the company since it must maintain low costs over the term of the contract to maintain a profit margin.

Space launches have material risks

The company is fined for malfunctions, failures, or delays and receives less contracts and bad press in the event of a problem.^[13] One of the largest risks to satellites in orbit or launch is orbiting debris. There are over 10,000 objects such as parts of spent rockets, hand tools, and other debris which orbit the earth. These objects, often less than 4 inches wide, can damage or destroy a satellite.^[17] Rocket launches also carry inherent risks, and the worldwide success rate for space launches is 91.1%. These failure are caused by many different problems such as equipment malfunctions, fuel leaks, or miscalculations. ^[6] In 1999, Lockheed Martin (LMT), a close competitor to Orbital Sciences, sent incorrect data to NASA and caused the destruction of a $125 million mission.^[18] Lockheed Martin lost future revenue from the continuing contract and lost favor for future contracts.

Competition

Because most of Orbital's revenue comes from government contracts, it has an interesting relationship with its competitors. It must compete with many of the companies for a given contract, but it also must work with or is asked to supply the same company. For example, Orbital supplies Boeing Company (BA) with interceptor boosters, which in turn adds a "kill vehicle" - a detonation device - and supplies it to the US Missile Defense Agency.^[19] On other projects, on contracts like for the Orion spacecraft issued in 2007, the two companies competed for a contract.

Unlike its competitors, Orbital Sciences produces only space related products. It has not branched off into other sectors like ammunitions, airplanes, or other military equipment. The companies that compete most closely with Orbital are:

• Boeing Company (BA): builds science, technology and national security satellites which are in competition with Orbital Sciences. Boeing is also in a joint venture with Lockheed Martin to produce space launch vehicles.^[20] Unlike Orbital, Boeing is involved in aviation and it unveiled its 787 Dreamliner in 2007.^[21]
• Lockheed Martin (LMT): makes target launch vehicles, interceptor launch vehicles, and satellites which compete with Orbital Sciences.^[20] Nearly all of Lockheed Matin's sales, 97%, are through government contracts. The company also makes airplanes which Orbital does not.^[22]
• Raytheon Company (RTN): competes for contracts for interceptor launch vehicles with Orbital Sciences. Like Orbital, the majority of its revenue is from contracts with the US Government, 86% in Raytheon's case.^[23] Raytheon, like Lockheed Martin, is more diversified than Orbital, and it manufactures other equipment for the US military such as radar, sonar, and unmanned aerial vehicles.^[24]
• Alliant Techsystems (ATK): competes with Orbital for Target Launch Vehicles and Space Launch Vehicles. The company also provides technical network services to control actions and data in space which competes with Orbital. Alliant Techsystems is a large supplier of ammunition to the US military, in which Orbital is not involved.^[25]

Russia has also developed a more extensive rocket launch program in recent years, while NASA has prepared to retire the remaining 3 Space Shuttles. The growth of Russia, instead of the US, as the leading organization running space missions will put Russian launches in competition with Orbital.^[26]

References

1. ↑ ^{1.0 1.1} ORB 10-K 2008 "U.S. Government Contracts" p.5
2. ↑ ^{2.0 2.1} ORB 10-K 2008 "Satellites and Space Systems" p.3
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8} ORB 10-K 2008 "Industry Segment Information" p.51
4. ↑ ^{4.0 4.1} Space News Business Report: "Orbital Wins Contract To Flight-Test Orion Safety System" 18 April 2007
5. ↑ ^{5.0 5.1} New Scientist Space "NASA's shrinking science budget worries lawmakers" 14 March 2008
6. ↑ ^{6.0 6.1} The Aerospace Corporation - Crosslink: "Space Launch Vehicle Reliability" December 2001
7. ↑ ORB 10-K 2008 "Export Sales and Major Customers" p.52
8. ↑ ^{8.0 8.1} ORB 10-K 2008 "Launch Vehicles" p.2
9. ↑ ORB 10-K 2008 "Advanced Space Progams" p.3
10. ↑ ORB 10-K 2008 "Transporation Management Systems" p.4
11. ↑ CDI "Space Weapons Spending in the FY 2008 Defense Budget" 21 Feb 2007
12. ↑ Universe Today "The Politics of Space: Obama wants to Increase NASA Funding" 6 Aug 2008
13. ↑ ^{13.0 13.1} ORB 10-K 2008 Item 1A "Risk Factors" p.9
14. ↑ ORB 10-K 2008 "Critical Accounting Policies and Significant Estimates" p.22
15. ↑ ORB 10-K 2008 "U.S. Government Contracts" p.6
16. ↑ ORB 10-K 2008 Item 1A "Risk Factors" p.9
17. ↑ The New York Times Space & Cosmos: "Orbiting Junk, Once a Nuisance, Is Now a Threat" 6 Feb 2007
18. ↑ Space - SpaceFlight "Units Blunder Sent Craft Into Martian Atmosphere: NASA" 30 Sept 1999
19. ↑ ORB 10-K 2008 "Description of Orbital's Products and Services" p.2
20. ↑ ^{20.0 20.1} ORB 10-K 2008 "Competition" p.4
21. ↑ Google Finance Boeing Company (BA)
22. ↑ Reuters Business & Finance Lockheed Martin Corp
23. ↑ Reuters Business & Finance Raytheon Co
24. ↑ Google Finance Raytheon Company
25. ↑ Google Finance: Alliant Techsystems (ATK)
26. ↑ Washington Post "NASA Wary of Relying on Russia" 7 March 2008