— Orbital Sciences Corp. reported higher revenue but lower profit for the three months ending March 31, blaming the earnings decline on continued development costs of the Taurus 2 rocket and unexpected difficulties in creating a hosted-payload interface for its commercial satellite product line.

Dulles, Va.-based Orbital said it has concluded that the February failure of its Taurus XL vehicle, which destroyed NASA’s Orbiting Carbon Observatory (OCO) satellite, was caused by a faulty pressure initiator in a gas-generator component that led to failure of the rocket’s fairing to separate.

In an April 29 conference call with investors, Orbital Chief Operating Officer J.R. Thompson said the defective fairing-separation system was “a supplier issue and dealt with some lot-acceptance testing of the pressure initiator.” He referred to “lower shock margins in these lot-acceptance tests” for the pressure initiators as being partly to blame, and said the initiator design would be modified. “We think it’s pretty straightforward,” he said.

NASA is conducting a parallel inquiry into the failure and has arrived “at basically the same” conclusion, J.R. Thompson said, adding that Orbital could be asked this summer to build a replacement satellite.

“We have been asked by NASA’s Jet Propulsion Laboratory to begin planning to duplicate the mission with an OCO-2 spacecraft, with a start state as early as this year,” he said.

Orbital spokesman Barron Beneski said April 28 that the company would decline further comment on the Taurus XL failure review until NASA had completed its analysis.

Orbital booked an $800,000 charge in the three-month period as a result of the failure, but also reported receiving a $5.3 million insurance claim following the same failure.

The company had been scheduled to receive $5.3 million from NASA had the launch and satellite separation been successful, and had insured against the potential loss of this revenue.

In its April 29 filing with the U.S. Securities and Exchange Commission (SEC), Orbital said it commonly takes out insurance against the loss of incentive fees.

Orbital reported losses totaling $3.5 million related to two government satellite programs. One is a cost-reimbursement contract in which Orbital is spending more than it expected on research and development “to put the company in a stronger competitive position for future work that will be decided later this year,” Orbital Chief Executive Officer David W. Thompson said during the call. He did not name the contract.

The second satellite program loss relates to Orbital’s work on the AMC-1R telecommunications satellite scheduled for launch in mid-2010. The satellite is owned by satellite fleet operator SES of Luxembourg but features a U.S. Air Force instrument called the Commercially Hosted Infrared Payload (CHIRP). CHIRP is a technology demonstrator to test future space-based infrared sensors.

SES’s Americom division signed a three-year, $65 million CHIRP contract with the Air Force in June 2008, and contracted with Orbital to integrate CHIRP into AMC-1R, whose main C- and Ku-band payload will broadcast television to cable head-ends in the United States from 103 degrees west as a replacement for the AMC-1 satellite now there.

Science Applications International Corp. of
, is building the CHIRP instrument under a $19 million contract with Orbital.

More than 90 percent of Orbital’s government business is conducted on a cost-reimbursable basis. But the CHIRP contract is a fixed-price arrangement, meaning Orbital cannot pass on to its customer the unexpected cost increases involved in designing the AMC-1R satellite interface to which CHIRP will be attached, and from which it will draw power.

David Thompson said the unanticipated charges will help Orbital complete the design of an interface that will be able to function with other hosted payloads. The two biggest commercial satellite fleet operators, SES and Intelsat of Bermuda, both are urging the
government to design instruments that can be piggyback payloads on commercial telecommunications missions.

Orbital management had warned investors that developing the new Taurus 2 rocket would be a drag on earnings until 2011. The vehicle is intended mainly for U.S. government missions, and Orbital expects to be reimbursed for some of the development costs associated with Taurus 2. But
government authorities have not yet signaled their approval.

In its SEC filing, Orbital said that since 2007 it has incurred $43 million that it expects should qualify as recoverable research and development expenses.

Taurus 2 is scheduled to make its inaugural flight in late 2010. J.R. Thompson said the various vehicle elements and launch-facility development at
Wallops Island
, remain on track, but that the Russian- and Ukrainian-built first stage remains a challenge.

“The area of significant uncertainty remains the AJ26 first-stage engine, primarily due to limited test exposure to
personnel,” J.R. Thompson said.

of Sacramento, Calif., is modifying
‘s NK-33 engine for use on Taurus 2’s first stage, and Ukrainian builders are providing other gear for the stage.