PARIS — The remaining 10 months of 2013 will be crucial for Orbital Sciences Corp. in determining whether its $1.9 billion contract with NASA to resupply the international space station is as profitable as the company’s other business lines.
Dulles, Va.-based Orbital’s immediate focus is completing a long-delayed hot fire of the first stage of its new Antares medium-lift rocket. A Feb. 13 attempt was stopped by the rocket’s on-board computer just 1.5 seconds before ignition when the computer detected lower-than-acceptable pressure in a nitrogen-purge tank.
A preliminary assessment is that one of the tank’s valves did not open — a relatively straightforward issue that can be addressed in time to make a second hot-fire attempt by Feb. 21, Orbital Chief Executive David W. Thompson said in a Feb. 14 conference call with investors.
A successful first-stage firing test would enable Orbital to launch its Antares demonstration mission, which will not be carrying the company’s Cygnus cargo capsule, by April. An Antares-launched Cygnus flight to the station could then occur this summer.
Success in those two missions would complete Orbital’s obligations under NASA’s Commercial Orbital Transportation Services (COTS) program, positioning the company to begin delivering cargo under the $1.9 billion Commercial Resupply Services (CRS) contract. Thompson said the first CRS mission could occur this fall, with a second flight either late this year or early in 2014.
The CRS contract calls for Orbital to fly eight Antares/Cygnus missions to the space station, delivering a total of 20,000 kilograms of supplies, by 2016.
The CRS contract was announced in December 2008. Since then, Orbital has been developing Antares and Cygnus and related infrastructure, incurring costs on the contract and billing NASA at predetermined rates.
NASA has been paying only 75 percent of these charges. Under the CRS contract, NASA withholds 25 percent of the total until each CRS cargo delivery mission is made, Orbital Chief Financial Officer Garrett E. Pierce said during the conference call.
Orbital has already completed about one-half of its total investment in its CRS program even though the company is still some eight months away from its first CRS flight. But of that approximately $1 billion in allowable billing costs to NASA, the company has received only about $750 million.
Thompson said Orbital had hoped CRS would be generating operating-profit margins of 10 percent. But it has been accruing profit at only a 5 percent margin up to now. The reason: Further Antares/Cygnus delays could consume the reserve of funds Orbital has been accumulating, eroding the program’s profitability. The program is already two years behind its original schedule.
Thompson said the company no longer believes it will book a 10 percent profit margin on CRS, but that this level could be reached on the expected follow-on contract for more supply missions as Orbital climbs the learning curve and reduces risk inherent in any new program.
“We have pretty healthy reserves, but we’ve got to get through the next six months or so … before I think the time might be appropriate to reassess how much of the reserves might be released,” Thompson said.
For 2012, Orbital reported $1.44 billion in total company revenue, an increase of 7 percent from 2011, with an operating profit margin of 7.8 percent.
With the last CRS deliveries scheduled to occur in 2016, Thompson said the company is likely to negotiate a follow-on contract with NASA in 2014.
The volume of any CRS-2 contract would depend on a decision by the station’s international partners — the United States, Russia, Europe, Japan and Canada — to extend the operations of the outpost beyond 2020. That decision has not been made.
Thompson said Orbital’s commercial telecommunications satellite business, which reported a 7 percent operating profit margin in 2012, will stay at around that level as the company invests in research and development of a new product. The new GeoStar-3 satellite platform will offer power of between 7 and 8 kilowatts, compared with the current GeoStar-2 platform, which starts at 5 kilowatts.
Thompson said that by Orbital’s count, 19 geostationary-orbiting commercial telecommunications satellites were ordered in 2012. Four were in Orbital’s weight class, meaning the lighter end of the market, and Orbital won two of these.
For 2013, Thompson said 17 to 20 satellites are likely to be ordered, four to six of them in Orbital’s class. The company expects to book three of these, he said.
Thompson said Orbital is slightly reducing its forecast for revenue and operating income for 2013 because of the cloudy outlook for the U.S. government’s budget in the coming months, and because of milestone events in Orbital programs that could affect financial performance.
He said NASA’s budget picture “is actually not bad,” and is better than the U.S. Defense Department’s budget outlook, with or without the threat of sequestration and automatic spending cuts that come with it.
Longer term, Thompson said the pressure on U.S. defense spending makes Orbital all the more comfortable with being a low-cost provider to the Pentagon, able to provide 80 percent of what competitors would offer for a military space program, for 40 to 50 percent of the cost.
