Fool.com: Orbital Bounds After Raising $75 Million (News) December 23, 1999

Orbital Bounds After Raising $75 Million

By Richard McCaffery (TMF Gibson)
December 23, 1999

Faced with debt that has to be paid and the need for capital, space technology and satellite services company Orbital Sciences (NYSE: ORB) sold a minority stake in a subsidiary today and raised $75 million to boost liquidity.

The Dulles, Virginia company moved up nearly $3 in trading, or 21%, to about $16 after raising the capital in a move that eased investors' fears about a cash crunch. Orbital sold a 33% stake in its MacDonald Dettwiler & Associates subsidiary to an investor group led by private investment firm CAI Capital Partners.

Orbital will own the remaining 67% stake in the unit, which develops satellite ground stations, information systems and services, space robotic systems, and other equipment and services.

"This transaction substantially improves Orbital's liquidity and cash reserves," David Thompson, Orbital's chairman and chief executive officer said in a statement. "At the same time, it also reinforces the company's commitment to unlocking shareholder value by realizing the worth of businesses developed, built-up and expanded by Orbital."

So how bad is Orbital's cash position? A simple way to find out is to take a quick look at working capital, which is the difference between current assets and current liabilities. Since current liabilities represent claims against assets that must be settled in one year (or one operating cycle, whichever is longer), a company needs to maintain a nice cushion between the two.

According to its quarterly report filed November 22, the company had $386 million in current assets and $376 million in current liabilities. That's cutting it close. A closer look at those accounts shows Orbital has $55.6 million in debt and $67 million in accounts payable, but only $21 million in cash. The rest of its current assets are in restricted short-term investments, receivables, and inventory. That's a liquidity crunch.

It's been a tough year for Orbital, which has to be admired for its entrepreneurial spirit. In 1990 Orbital unveiled the world's first privately developed space launch vehicle, and in 1998 it shipped the world's first handheld satellite communications device. Its Orbcomm subsidiary operates a fleet of 28 small satellites that relay messages to handheld terminals. It's a business that's viewed as having enormous potential by industry observers, but it's a market the company is really creating from scratch. Since 1982 the company has built and launched at least 74 satellites.

But in October Orbital announced plans to restate its financial results at the recommendation of its new auditing firm, PricewaterhouseCoopers. The pending restatement stemmed from OrbImage, an affiliate that operates satellites used to take color pictures of the Earth's surface. While the restatement isn't expected to affect revenues, net income, or cash flows, it might increase losses related to affiliates and interest charges by $60 million. (For more on this click here.) The company said KPMG, Orbital's previous auditor, approved the accounting treatment of OrbImage but later changed its position.

The problem is that business units like Orbcomm are cash hungry since they don't yet have enough customers to pay for operations. Through the first nine months of the year, Orbital contributed $41.5 million in cash to Orbcomm and $101.3 million in other investments and capital expenditures, while generating just $53.2 million in cash from operations.

In its quarterly filing, the company said it has enough money to fund operations through early 2000 but that it must then raise additional capital from cash or debt. Right now its ability to do that is limited because of the pending restatement.

The $75 million raised from selling a piece of MacDonald should give the company much needed breathing room. With its Pegasus Rocket, the Orbcomm unit, and valuable NASA contracts, there's plenty of potential on the launch pad.

But, until its finances are put squarely in order, it's safer to watch from the sidelines.

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