[funny how the use the term market; this would seem to be an example of Braudel's notion of capitalism as the anti-market..]
Orbital's Fortunes Launched Again Defense Contract Boosts Struggling Satellite Firm By Renae Merle Washington Post Staff Writer Monday, March 24, 2003; Page E01 In the late afternoon of Feb. 6, Orbital Sciences Corp. executives and rocket scientists gathered in the auditorium of the company's Dulles headquarters and watched a live video feed of a 50-foot, 50,000-pound rocket shooting 1,000 miles into space and 3,500 miles across the Pacific Ocean. It was an early test of a missile defense launcher and, the executives hoped, proof of Orbital's rising fortunes. For more than four years, Orbital has struggled with high debt, bad investments, troubled accounting, Wall Street skeptics doubting its business acumen, and a telecom bust that sapped its customer base. That was until Orbital was chosen in February 2002 to develop a rocket central to the missile defense program championed by President Bush. Without the more than $400 million contract, the largest in the company's history, Orbital may have been forced into bankruptcy reorganization, industry analysts said. This success has come at a price. As its commercial market continues to languish, the relatively small Orbital finds itself up against industry giants such as Lockheed Martin Corp. in the hotly competitive defense market. The missile defense contract helped Orbital raise $135 million in a bond deal that carries a high interest rate, which worries Wall Street. Nevertheless, the company is considered to be in far better position than it was two years ago. On top of its lucrative missile defense business, it is gearing up to compete for a new space vehicle to fly astronauts to the international space station. And last year marked the completion of Orbital's "back to basics" strategy, fixing its balance sheet, getting out of ancillary businesses and putting the focus back on satellites and rockets, said David W. Thompson, chairman and chief executive. "We were quite pleased with the way things went," he said. Thompson, a childhood space buff turned NASA engineer, founded the company in 1982 with two college friends, realizing a long-held dream to own a space-flight company. While Lockheed and Boeing Co. focused on launching large, expensive satellites for commercial customers, Orbital cast itself as the low-cost alternative, offering its services for sometimes half the price. At a time when many satellites were stationed 22,000 miles above the Earth, Orbital positioned its satellites 300 to 500 miles up, keeping costs down. The strategy worked, analysts said, even if Orbital's cheaper alternative meant customers were restricted to simpler missions using smaller satellites. "It's like comparing a Saturn and an Escalade," said Jim Lewis, director for technology and public policy at the Center for Strategic and International Studies. "I have to admit the first time I heard about Orbital I thought these people would be out of business in two years." Added Paul Nisbet, a defense industry analyst with JSA Research: "They are certainly a force to be dealt with in the smaller-satellite market, as much as there is a market." In fact, the company didn't make an annual profit until 1991, a year after it went public, and suffered several mishaps, including the destruction of two rockets in flight. Then Orbital began searching for fatter profit margins and new ways to grow. In the mid-1990s Orbital established a subsidiary, Orbital Imaging Corp., that used a constellation of satellites to provide spy-grade photographs of the Earth for commercial clients. Another gamble, Orbital Communications Corp., a joint venture with Teleglobe Inc., used satellites for data communications. Both ventures become money-losing casualties of the telecom bust when demand didn't meet expectations. Both also eventually filed for bankruptcy; Orbital sold its interest in Orbital Communications and does not expect to have a relationship with Orbital Imaging much longer. By 1999 Orbital was battling questions about its accounting, including the timing of revenue recognition from contracts. It eventually restated three years of earnings and settled shareholder lawsuits in July 2000 for $22.5 million. The turning point came when Orbital needed to repay $100 million in bonds maturing October 2002. With a higher stock price, the company could have issued more shares to raise the capital necessary to retire the debt. But with the controversy surrounding its accounting and the dim outlook on the telecommunications market, that wasn't possible, industry analysts and company officials said. Existing bondholders wanted to be paid back in full, and the only alternative they offered was gaining control of the company, said Mark Carmen, a managing director at Jefferies & Co., which acted as Orbital's investment banker. "We didn't think the situation warranted handing the keys over to the bondholders," said Bill Derrough, co-head of the Jefferies restructuring practice. Still, Derrough admits: "This was not a easy sell at all. This was a very, very difficult deal." Orbital finally did sell $135 million in new bonds, but they came with 12 percent interest and warrants that, if bondholders exercise them, could potentially raise its share count by 16.5 million, diluting shareholder equity. The company "paid a stiff price" for the financing, said Phil Finnegan of the Teal Group, a defense research firm. Thompson acknowledges the deal's drawbacks: "The debt financing was . . . more expensive in some respects than we would like, but it was the better alternative in terms of our shareholders." Later this year, Orbital will consider ways to address the high-interest debt, a company official said. But the financing may have been impossible if bondholders thought Orbital's business was shaky. Without the missile defense contract, bondholders would have balked, industry officials say. Orbital was in the right place at the right time. Boeing was slated to build a rocket capable of launching a warhead thousands of miles into space and positioning it to intercept an incoming target. But the Chicago-based aerospace company ran into problems developing a system. The rocket was 18 months behind schedule and Boeing continued to have trouble integrating its commercial-based technology, said Rick Lehner, a spokesman for the Missile Defense Agency. "As [a] risk reduction measure we decided to have two different boosters in development," Lehner said. Boeing, the program's prime contractor, turned over its troubled rocket to Lockheed for rehabilitation and picked Orbital to build an alternate version. Orbital tested the rocket over the Pacific Ocean on Feb. 6. The approximately $400 million contract buoyed Orbital's finances. The company reported a 33 percent increase in revenue for 2002, to $551.6 million, and attributed 76 percent of the growth to the missile defense contract. "Missile defense is proving to be a windfall for Orbital Sciences at a time when the commercial market is likely to be weak for years," Finnegan said. Orbital will compete against Lockheed for another contract to continue developing the missile defense technology, including building 10 rockets designed to satisfy President Bush's orders that early stages of the missile defense shield be established in Alaska and California by the end of 2004. While missile defense will continue to drive growth during the near term, Orbital is also looking to other markets for expansion, Thompson said. Orbital acknowledges that its relatively small size could hamper its bid for a NASA contract to build a next-generation vehicle that could be used to shuttle astronauts to the international space station. So it teamed with Northrop Grumman Corp. for the competition, which will pit them against Lockheed and Boeing. "Orbital would be a good competitor. . . . They are sort of the underdog so they would try harder," said Lewis of the Center for Strategic and International Studies. "It is a market area that we have not been a major participant in," Thompson said. It would represent a "more challenging market for us." The company is also optimistic that the commercial market could gradually improve over the next few years, company officials said. Orbital had one commercial satellite order in 2002 and forecasts orders for two or three this year. A rebound likely will not mimic 1990s levels, but will help balance the company's portfolio, Thompson said. "We think that sticking to our current strategy will take the company a long way," he said.
