Garrett E. Pierce, Vice Chairman and Chief Financial Officer, Orbital Science Corp.

Orbital Sciences Corp. was overextended and in trouble when Garrett Pierce came aboard in August 2000 as executive vice president and chief financial officer.

The company — whose shares regularly traded at well above $40 in 1998 at the height of the stock market boom — was by then facing Wall Street’s version of a perfect storm. Its woes included cost-growth problems on satellite programs; an anemic market for its Pegasus and Taurus small-satellite launchers; heavy investments in satellite messaging and imaging ventures that were hemorrhaging cash in an inexorable slide toward bankruptcy; and a hyperinflated stock market whose bubble was about to burst.

Orbital’s share value tumbled during the latter half of 2000, and by October 2001 had plunged to historic lows of less than $2. The company also faced a looming cash crisis in the form of $100 million in bond payments that were coming due Oct. 1, 2002. Failure to meet that deadline could have forced the company into bankruptcy.

Pierce’s marching orders were to get Orbital back to basics. He helped engineer the sell-off of Orbital’s non-core assets, generating some $375 million in cash that the company used to shore up its operation and pay down its debt. Pierce also raised $135 million in very difficult market conditions to pay off the bondholders.

More recently, Orbital’s fortunes have risen dramatically thanks in part to the surge in Pentagon space and missile defense spending, and a modest telecom rebound that has created some demand for the company’s Star brand of small geostationary satellite platforms. The company has enjoyed double-digit growth for the past four years and its stock price has recovered — although not to the level that Pierce thinks it should be.

Pierce spoke recently with Space News deputy editor Warren Ferster at Orbital’s Dulles, Va., offices.

Why is Orbital’s stock price so low given its financial performance in recent years?

We often ask ourselves that question. We feel our stock is significantly undervalued on any multiples you look at.

What do you think is an appropriate valuation?

Well, I’m not at liberty to say where I think the stock will go. But clearly this is not a single-digit stock. Any barometer you use — we’re forecasting that we’re going to generate $40 million to $45 million of free cash flow; we’re going to show earnings per share of 40-45 cents. I can tell you that Wall Street says it’s anywhere from a $12-$16 stock. These are not my reports; these are the reports that are put out by independent analysts. And they’re highly analytical — they have tremendous research capability. That doesn’t square with a $9 stock [Editor’s note: Orbital’s stock rose above $10 per share May 16 and closed May 25 at $10.58].

Are you doing anything to elevate the stock price?

I’ll give you an example. I got back to my office at about 7 o’clock last night. We were in the Washington area meeting with a group of investors, and I’ll be getting up at 4:30 tomorrow morning to go up to New York and spend the day there. And I think literally almost every week, for the next number of weeks, or every other week, we’re out on the road talking about Orbital. Whether it’s Boston or New York or San Francisco, or Denver, you name it.

Has the reduction in planned spending next year on the Pentagon’s Kinetic Energy Interceptor (KEI) program affected Orbital’s financial outlook?

We have not seen it. We are participating in KEI in the development stage and we have not seen any pull-back in our efforts in that regard. If there’s anything it’s very, very small.

What is your rate of booster production for the Ground-based Midcourse Defense system?

We’re producing about one rocket a month right now and we see that for the foreseeable future. I don’t have a current number for you, but we’re covered into 2007. We’re looking for some additional orders later this year, which will take us beyond that.

What is the next big thing for Orbital?

We’re doing a lot of work in the target area right now, in sea-skimming supersonic targets. It’s been a very successful development for us. In satellites, we’re doing work in the defense area right now, and I think that’s going to be a growing important area for us. I can’t get into specifics but I can tell you we are building systems in that area right now and we plan to expand further there. And the geostationary-orbit communications satellite business is starting to come around again. We just booked some business with PanAmSat.

Orbital said recently that its geostationary satellite division would experience several money-losing quarters while it develops a more capable version of the Star platform under a contract with SingTel Optus of Australia. When do you expect to complete that program?

Sometime in 2007. We’ve already taken the hits. The project is an excellent project. We’re building two satellites for Optus and it’s a new platform, a more powerful platform. It uses different technologies for batteries and that’s causing us to incur some research and development costs, which is part of our plan.

What is the difference between taking a research and development hit on a production program and incurring a cost overrun?

We went into this with our eyes open. It was not a cost overrun. It’s part of our strategic plan to do that, to move up a bit in the niche that we participate in.

Is the classified side of your business growing substantially?

I wouldn’t want to quantify a percentage, but it is growing significantly for us, yes.

How concerned are you about the possibility of a decline in defense spending?

We have other parts of our business. We have a geostationary satellite business which we think will start to kick in, we think the target business is going to remain strong — they’re going to keep testing their systems. The missile defense programs could go away, but I don’t think it’s going to happen; there’s too much going on politically outside of our country.

One other thing — we’re sitting on in excess of $125 million in cash right now, and we’re forecasting we’re going to generate $40 million-$45 million of free cash flow. If you do that math, you end the year at around $165 million, maybe $170 million in cash. That’s a high-class problem to have.

Orbital said in its 2004 annual report it is looking for potential acquisitions to broaden its business. Are you looking for anything in particular?

We mentioned the tactical missile area as one area that we’re very interested in. Needless to say we would be interested in augmenting our military intelligence efforts. So those are two areas that come to mind. We’re not going to start to get vertically integrated in the sense of buying a battery company or a company that makes solar arrays.

Of Orbital’s three main business segments, Transportation Management Systems, which provides fleet management services using GPS and wireless technology, is the only one whose revenues are declining. Why is that and what is the future of this operation?

We pulled back in that business because it was having some problems — profitability problems, cash-flow problems — and changed the management there. We also decided to be very selective on the projects that we did to ensure that they would be profitable, generate free cash flow and that we’d execute them well technically. It’s a profitable business right now. It is a good business but it’s not a business that Orbital wants to be in long term.