Houston, We Have a Problem (News) October 29, 1999

Houston, We Have a Problem

By Richard McCaffery (TMF Gibson)
October 29, 1999

The bouncing sound you heard this morning was Orbital Science's (NYSE: ORB) stock price, which dropped 25% when the company announced it would restate financial results from 1997 through Q2 1999, then rebounded sharply as cooler heads prevailed.

The restatement, which comes at the recommendation of its new auditing firm, PricewaterhouseCoopers, isn't expected to affect revenues, net income, or cash flows, but could increase losses related to affiliates and interest charges by $60 million. This figure is the company's estimate, and it hasn't been reviewed by its auditor.

For those who don't follow the commercial launch and satellite industry's every move, Orbital Sciences manufactures, operates, and markets launch vehicles (rockets), satellites, electronics, sensor systems, and satellite ground systems and software. Its Orbcomm subsidiary, for example, operates a fleet of 28 small satellites that relay messages to handheld terminals. Since 1982 the company has built and launched 74 satellites.

The restatement stems from OrbImage, an affiliate that operates satellites used to take color pictures of the Earth's surface. The images are used by fisherman to spot fishing beds, by farmers to improve crop yields, and by meteorologists to collect weather data.

Orbital owns 60% of the stock in OrbImage but doesn't control its operational or financial affairs and therefore doesn't consolidate the results in its earnings. But it recognizes all the revenue earned and costs incurred by the affiliate. At the end of last year, Orbital had invested $83 million in OrbImage.

The division has reported heavy losses for the last three years. Apparently, KPMG, Orbital's previous auditor, approved the accounting treatment of OrbImage but later changed its position, according to Orbital. Now PricewaterhouseCoopers is taking a fresh look.

To make matters worse, the new auditors have raised questions about the valuation of Magellan, an Orbital subsidiary that offers Global Positioning System (GPS) navigational equipment for hiking, driving, and other uses. The impact of this inquiry is unclear.

The entrepreneurial company has an impressive list of achievements: In 1990 Orbital unveiled the world's first privately developed space launch vehicle; in 1995 it launched the first operational low-Earth-orbit commercial communications satellite; in 1998 it shipped the world's first handheld satellite communications device.

Because it's blazing trails, however, Orbital has taken plenty of arrows. It's had to deal with launch failures, delayed projects, and, of course, rapidly changing technology. The high cost of building and launching satellites, along with the inherent risk of the space industry, has made ownership in the company a roller coaster ride.

The trip has been mostly down this year with shares falling from more than $40 to less than $20 since January.

Still, the company is expected to grow earnings nearly 42% over the long term as its services affiliates, namely Orbcomm and OrbImage, gather speed. Who knows if this will happen. After all, Orbital is creating many of the markets it's servicing, and that takes time.

The point is that today's accounting announcement shouldn't affect the company's growth rate or ability to execute, unless investors lose confidence and the company runs into financing problems -- which is always an issue in the satellite business.

While today's announcement raises questions, Orbcomm is the same company it was yesterday, the day before, and last year. Investors should wait for the fully audited restatement and go from there.

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