| ORBITAL SCIENCES CORP /DE/ Item 1A Risk Factors Investors should carefully consider, among other factors, the risks listed below |
| We derive a significant portion of our revenues from US government contracts, which are dependent on continued political support and funding and are subject to termination by the US government at any time |
| During 2005, approximately 77prca of our total annual revenues, and at December 31, 2005, approximately 70prca of our firm backlog was derived from US government contracts |
| Most of our US government contracts are funded incrementally on a year-to-year basis and are subject to uncertain future funding levels |
| Furthermore, our direct and indirect contracts with the US government may be terminated or suspended by the US government or its prime contractors at any time, with or without cause |
| There can be no assurance that government contracts will not be terminated or suspended in the future, or that contract suspensions or terminations will not result in 7 _________________________________________________________________ unreimbursable expenses or charges or other adverse effects on our financial condition |
| A decline in US government support and funding for key missile defense and space programs could materially adversely affect our financial condition and results of operations |
| We are also subject to laws and regulations regulating the formation, administration and performance of, and accounting for, US government contracts |
| Failure to comply with applicable laws could result in contract termination, price or fee reductions, civil or criminal penalties, injunctions or other sanctions and/or administrative sanctions such as suspension or debarment from contracting with the US government |
| In the second quarter of 2005, the US government commenced an investigation which we believe is focused on contracting matters related to certain US government launch vehicle programs |
| Should any violations be alleged or found, we could face the possibility of criminal or civil penalties and/or administrative sanctions such as suspension or debarment from contracting with the US government, depending on the nature of such violations |
| In any event, responding to this investigation involves significant expense and management attention |
| Our US government contracts are subject to audits that could result in a material adverse effect on our financial condition and results of operations if a material adjustment were required |
| The accuracy and appropriateness of costs charged to US government contracts are subject to regulation, audit and possible disallowance by the Defense Contract Audit Agency or other government agencies |
| Accordingly, costs billed or billable to US government customers are subject to potential adjustment upon audit by such agencies |
| Responding to governmental audits, inquiries or investigations may involve significant expense and divert management attention |
| Also, an adverse finding in any such audit, inquiry or investigation could involve fines, injunctions or other sanctions |
| Termination of our backlog of orders could negatively impact our revenues |
| All of our direct and indirect contracts with the US government or its prime contractors may be terminated or suspended at any time, with or without cause, for the convenience of the government |
| Our contract with Boeing to provide interceptor boosters for MDA’s GMD program is material, and the program’s termination could have an adverse impact on our liquidity and operations |
| From time to time, certain of our commercial contracts have also given the customer the right to unilaterally terminate the contracts |
| For these reasons, we cannot assure you that our backlog will ultimately result in revenues |
| We may not receive full payment for our satellites or launch services and we could incur penalties in the event of failure, malfunction or if our satellites are not delivered or our rockets are not launched on schedule |
| Additionally, some satellite contracts require us to refund cash to the customer if performance criteria, which cover periods of up to 15 years, are not satisfied |
| Certain launch contracts have payments contingent upon a successful launch |
| While our practice is generally to procure insurance policies that would indemnify us for satellite incentive fees that are not earned and for performance refund obligations, insurance may not continue to be available on economical terms, if at all |
| Further, we may elect not to procure insurance |
| In addition, some of our satellite and launch contracts require us to pay penalties in the event that satellites are not delivered, or the launch does not occur, on a timely basis, or to refund all cash receipts if a contract is terminated for default prior to launch |
| Our failure to receive incentive payments, or a requirement that we refund amounts previously received or that we pay delay penalties, could adversely affect our results of operations, profitability and liquidity |
| 8 _________________________________________________________________ The majority of our contracts are long-term contracts, and our revenue and profit recognition under such contracts may be adversely affected to the extent that actual costs exceed estimates or that there are delays in completing such contracts |
| The majority of our contracts are long-term contracts |
| We generally recognize revenues on long-term contracts using the percentage-of-completion method of accounting, whereby revenue and profit is recognized based on actual costs incurred in relation to total estimated costs to complete the contract |
| Revenue and profit from a particular contract may be adversely affected to the extent that estimated costs to complete increase, incentive or award fee estimates are reduced, delivery schedules are delayed or progress under a contract is otherwise impeded |
| Contract cost overruns could subject us to losses and impair our liquidity |
| Cost overruns may result in losses and, if significant, could adversely impact our financial results and our liquidity: • Under fixed-price contracts, our customers pay us for work performed and products shipped without adjustment for any cost overruns |
| Therefore, we generally bear all of the risk of losses as a result of increased costs on these contracts, although some of this risk may be passed on to subcontractors |
| Some of our fixed-price contracts provide for sharing of unexpected cost increases or savings realized within specified limits and may provide for adjustments in price depending on actual contract performance other than costs |
| We bear the entire risk of cost overruns in excess of the negotiated maximum amount of unexpected costs to be shared |
| • Under cost-reimbursable contracts, we are reimbursed for allowable incurred costs plus a fee, which may be fixed or variable (based, in part, on the customer’s evaluation of our performance under the contract) |
| There is no guarantee as to the amount of fee, if any, we will be awarded under a cost-reimbursable contract with a variable fee |
| In addition, the price on a cost-reimbursable contract is based on allowable costs incurred, but generally is subject to contract funding limitations |
| If we incur costs in excess of the amount funded, we may not be able to recover such costs |
| Our success depends on our ability to penetrate and retain markets for our existing products and to continue to conceive, design, manufacture and market new products on a cost-effective and timely basis |
| We anticipate that we will continue to incur expenses to design and develop new products |
| There can be no assurance that we will be able to achieve the technological advances necessary to remain competitive and profitable, that new products will be developed and manufactured on schedule or on a cost-effective basis or that our existing products will not become technologically obsolete |
| Our failure to predict accurately the needs of our customers and prospective customers, and to develop products or product enhancements that address those needs, may result in the loss of current customers or the inability to secure new customers |
| The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends and can take a significant amount of time to complete |
| We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or acceptance of new products and enhancements |
| 9 _________________________________________________________________ There can be no assurance that our products will be successfully developed or manufactured or that they will perform as intended |
| Most of the products we develop and manufacture are technologically advanced and sometimes include novel systems that must function under highly demanding operating conditions and are subject to significant technological change and innovation |
| From time to time, we experience product failures, cost overruns in developing and manufacturing our products, delays in delivery and other operational problems |
| We may experience some product and service failures, schedule delays and other problems in connection with our launch vehicles, satellites, transportation management systems and other products in the future |
| Some of our satellite and launch services contracts impose penalties on us for delays, which could be significant |
| In addition to any costs resulting from product warranties or required remedial action, product failures or significant delays may result in increased costs or loss of revenues due to postponement or cancellation of subsequently scheduled operations or product deliveries and claims against performance bonds |
| Negative publicity from product failures may also impair our ability to win new contracts |
| If our key suppliers fail to perform as expected, we may experience delays and cost increases, and our operating results may be impacted adversely |
| We purchase a significant percentage of our product components, structural assemblies and some key satellite components and instruments from third parties |
| We also occasionally obtain from the US government parts and equipment used in the production of our products or the provision of our services |
| In addition, we have a sole source for the rocket motors we use on our Pegasus and Taurus launch vehicles and the interceptor boost vehicles that we are producing for MDA under our contract with Boeing |
| If our subcontractors fail to perform as expected or encounter financial difficulties, we may have difficulty replacing them in a timely or cost effective manner |
| As a result, we may experience delays that could result in additional costs, a customer terminating our contract for default, or damage to our customer relationships, causing our revenues, profitability and cash flow to decline |
| In addition, negative publicity from any failure of one of our products as a result of a failure by a key supplier could damage our reputation and prevent us from winning new contracts |
| Our international business is subject to risks |
| For the years ended December 31, 2005, 2004 and 2003, direct sales to non-US customers comprised approximately 10prca, 15prca and 19prca, respectively, of our consolidated revenues |
| Further, as of December 31, 2005, approximately 19prca of our firm backlog was derived from non-US customers |
| International contracts are subject to numerous risks, including: • political and economic instability in foreign markets; • restrictive trade policies of the US government and foreign governments; • inconsistent product regulation by foreign agencies or governments; • imposition of product tariffs and burdens; • costs of complying with a wide variety of international and US export laws and regulatory requirements; • inability to obtain required US export licenses; and • foreign currency and standby letter of credit exposure |
| 10 _________________________________________________________________ We operate in a regulated industry, and our inability to secure or maintain the licenses, clearances or approvals necessary to operate our business could have a material adverse effect on our financial condition and results of operations |
| Our ability to pursue our business activities is regulated by various agencies and departments of the US government and, in certain circumstances, the governments of other countries |
| Commercial space launches require licenses from the DoT, and operation of our L-1011 aircraft requires licenses from certain agencies of the DoT, including the Federal Aviation Administration |
| Our classified programs require that we and certain employees maintain appropriate security clearances |
| There can be no assurance that we will be successful in our future efforts to secure and maintain necessary licenses, clearances or regulatory approvals |
| Exports of our products, services and technical information frequently require licenses from the DoS or from the DoC We have a number of international customers and subcontractors |
| Our inability to secure or maintain any necessary licenses or approvals or significant delays in obtaining such licenses or approvals could negatively impact our ability to compete successfully in international markets, and could result in an event of default under certain of our international contracts |
| We face significant competition in each of our lines of business and many of our competitors possess significantly more resources than we do |
| Many of our competitors are larger and have substantially greater resources than we do |
| Furthermore, it is possible that other domestic or foreign companies or governments, some with greater experience in the space industry and many with greater financial resources than we possess, could seek to produce products or services that compete with our products or services, including new launch vehicles using new technology which could render our launch vehicles less competitively viable |
| Some of our foreign competitors currently benefit from, and others may benefit in the future from, subsidies from or other protective measures by their home countries |
| Our financial covenants may restrict our operating activities |
| Our revolving credit facility and the indenture governing our 9prca senior notes contain certain financial and operating covenants, including, among other things, certain coverage ratios, as well as limitations on our ability to incur debt, make dividend payments, make investments, sell all or substantially all of our assets and engage in mergers and consolidations and certain acquisitions |
| These covenants may restrict our ability to pursue certain business initiatives or certain acquisition transactions |
| In addition, failure to meet any of the financial covenants in our credit facility could cause an event of default under and/or accelerate some or all of our indebtedness, which would have a material adverse effect on us |
| The loss of executive officers and our inability to retain other key personnel could adversely affect our operations |
| Our inability to retain our executive officers and other key employees, including personnel with security clearances required for classified work and highly skilled engineers, could have a material adverse effect on our operations |
| The anticipated benefits of future acquisitions may not be realized |
| From time to time we may evaluate potential acquisitions that we believe would enhance our business |
| Were we to complete any acquisition transaction, the anticipated benefits may not be fully realized if we are unable to successfully integrate the acquired operations, technologies and personnel into our organization |
| 11 _________________________________________________________________ We are subject to environmental regulations |
| We are subject to various federal, state and local environmental laws and regulations relating to the operation of our business, including those governing pollution, the handling, storage and disposal of hazardous substances and the ownership and operation of real property |
| Such laws may result in significant liabilities and costs |
| We do not believe that compliance with or liability under environmental laws and regulations has had a material impact on our operations to date, but there can be no assurance that such laws and regulations will not have a material adverse effect on us in the future |
| Our restated certificate of incorporation, our amended and restated bylaws, our stockholder rights plan and Delaware law contain anti-takeover provisions that may adversely affect the rights of our stockholders |
| Our Board of Directors has the authority to issue up to 10 million shares of our preferred stock, dlra0dtta01 par value per share, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders |
| The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future |
| The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock |
| In addition to our ability to issue preferred stock without stockholder approval, our charter documents contain other provisions which could have an anti-takeover effect, including: • our charter provides for a staggered Board of Directors as a result of which only one of the three classes of directors is elected each year; • any merger, acquisition or other business combination that is not approved by our Board of Directors must be approved by 66^2/3prca of voting stockholders; • stockholders holding less than 10prca of our outstanding voting stock cannot call a special meeting of stockholders; and • stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings |
| In 1998, we adopted a stockholder rights plan which is intended to deter coercive or unfair takeover tactics |
| Under the rights plan, a preferred share purchase right, which is attached to each share of our common stock, generally will be triggered upon the acquisition, or actions that would result in the acquisition, of 15prca or more of our common stock by any person or group |
| If triggered, these rights would entitle our stockholders (other than the acquirer) to purchase, for the exercise price, shares of Orbital’s common stock having a market value of two times the exercise price |
| The exercise price, which is subject to certain adjustments, is dlra210 per right |
| The stock purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors |
| In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which restrict the ability of current stockholders holding more than 15prca of our voting shares to acquire us without the approval of 66^2/3prca of the other stockholders |
| These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction |
| They could also have the effect of discouraging others from making tender offers for our common stock |
| As a result, these provisions may prevent our stock price from increasing 12 _________________________________________________________________ substantially in response to actual or rumored takeover attempts |
| These provisions may also prevent changes in our management |
| We may not have the ability to raise the funds necessary to finance the repurchase offer required by the indenture governing our senior notes in the event of a change of control, which may prevent us from entering into or consummating a change of control transaction otherwise in the best interests of our stockholders |
| In the event of a change of control, under the terms of the indenture governing the terms of our dlra126dtta4 million aggregate principal amount of our 9prca senior notes due 2011, we are required to offer to repurchase the notes at a premium |
| In addition, our repurchase of the notes as a result of a change of control may be prohibited or limited by, or constitute an event of default under, the terms of our credit facility or the terms of other agreements which we may enter into from time to time |
| Because our failure to repurchase the notes would constitute an event of default under the indenture, we may not be able to consummate a change of control transaction, even if the transaction may be in the best interests of our stockholders |