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| ORBT > SEC Filings for ORBT > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
Executive Overview
The results of operations for the three months and nine months ended September 30, 2008 include the results of ICS which was acquired effective December 31, 2007. The Company recorded an increase in revenues for the three months ended September 30, 2008 due to the inclusion of ICS. Net sales increased by 10.1% for the quarter, but exclusive of ICS, net sales would have decreased by 7.7%. However, sales from the Company's Power Group increased by 23.3% for the quarter compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and decreased investment and other income during the current period, the Company recorded a decrease in net income to $215,000 for the three months ended September 30, 2008 compared to $553,000 for the three months ended September 30, 2007. Net sales increased by 4.0% for the nine months but exclusive of ICS, net sales would have decreased by 15.4%. However, sales from the Company's Power Group increased by 21.4% for the nine months compared to the prior year. Due to lower gross margins, higher selling, general and administrative expenses and decreased investment and other income during the current period, the Company recorded a net loss of $80,000 for the nine months ended September 30, 2008, compared to net income of $1,603,000 for the nine months ended September 30, 2007.
Our backlog at September 30, 2008 was approximately $14,200,000 compared to $16,000,000 at September 30, 2007 which was exclusive of ICS. Backlog was $15,300,000 at June 30, 2008. The Company's lower profitability reflects weakness in the Company's Electronics Group which is being offset by a record year of bookings and revenue from its Power Group. There is no seasonality to the Company's business. Our shipping schedules are generally determined by the shipping schedules outlined in the purchase orders received from our customers. Both of our operating segments are pursuing a significant amount of business opportunities and our confidence level remains high with respect to receiving many of the orders we are pursuing although timing is always an uncertainty. Nevertheless, we remain very encouraged by our business environment although there is growing uncertainty due to the current credit crisis, a potential slowing economy and a new administration in Washington.
Our success of the past few years has significantly strengthened our balance sheet evidenced by our 3.5 to 1 current ratio at September 30, 2008. We currently have a $3,000,000 credit facility in place. As a result of lower profitability related to customer shipping delays described under "Results of Operations" below, the Company was not in compliance with two of its financial covenants at September 30, 2008. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009 the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The lender instituted an unused line fee of .25% per annum, as the cost to the Company for the waiver and amendment to the loan agreements.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and the results of its operations are based on the Company's financial statements and the data used to prepare them. The Company's financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we re-evaluate our judgments and estimates including those related to inventory valuation, the valuation allowance on the Company's deferred tax asset, goodwill impairment, valuation of share-based compensation and revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect more significant judgments and estimates in the preparation of the consolidated financial statements.
Inventories
Inventory is valued at the lower of cost (specific, average and first-in, first-out basis) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for the Company's products can be forecasted based on current backlog, customer options to reorder under existing contracts, the need to retrofit older units and parts needed for general repairs. Although the Company makes every effort to insure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have an impact on the level of obsolete material in its inventory and operating results could be affected, accordingly. However, world events have forced our country into various situations of conflict whereby equipment is used and parts may be needed for repair. This could lead to increased product demand as well as the use of some older inventory items that the Company had previously determined obsolete.
Deferred tax asset
At September 30, 2008, the Company had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and federal and state net operating loss carry-forwards of approximately $21,000,000 and $7,000,000, respectively, that expire through 2025. Approximately, $17,000,000 of federal net operating loss carry-forwards expire between 2010 and 2012. In addition, the Company receives a tax deduction when their employees exercise their non-qualified stock options thereby increasing the Company's deferred tax asset. The Company records a valuation allowance to reduce its deferred tax asset when it is more likely than not that a portion of the amount may not be realized. The Company estimates its valuation allowance based on an estimated forecast of its future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on its deferred tax asset and operating results could be affected, accordingly. Due to the Company's record of profitability, the acquisition of ICS, and the unprecedented amount of new opportunities in the prototype and preproduction stage, the Company increased its projection for profitability for future periods and increased its estimate of probability that it will attain those profit levels; thereby reducing its valuation allowance on its deferred tax asset.
Impairment of Goodwill
The Company has significant intangible assets including goodwill and other acquired intangibles. In determining the recoverability of goodwill and other intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for those assets not previously recorded. The Company applies Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, the costs of certain intangible assets are no longer subject to amortization. These costs are reviewed for potential impairment on an annual basis, which occurred during the first quarter of 2008. The Company determined that there was no impairment to its goodwill and other intangible assets.
Share-Based Compensation
Effective January 1, 2006, the Company began recognizing share-based compensation under SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based awards. Total share-based compensation expense was $171,000 and $77,000 for the nine and three months ended September 30, 2008, respectively, compared to $134,000 and $46,000 for the respective prior year periods. The estimated fair value of stock options granted was calculated using the Black-Scholes model. This model requires the use of input assumptions. These assumptions include expected volatility, expected life, expected dividend rate, and expected risk-free rate of return.
Revenue and Cost Recognition
Revenue and costs under larger, long-term contracts are reported on the percentage-of-completion method. For projects where materials have been purchased but have not been placed in production, the costs of such materials are excluded from costs incurred for the purpose of measuring the extent of progress toward completion. The amount of earnings recognized at the financial statement date is based on an efforts-expended method, which measures the degree of completion on a contract based on the amount of labor dollars incurred compared to the total labor dollars expected to complete the contract. When an ultimate loss is indicated on a contract, the entire estimated loss is recorded in the period. Assets related to these contracts are included in current assets as they will be liquidated in the normal course of contract completion, although this may require more than one year.
Results of Operations
Three month period endedSeptember 30, 2008 v.September 30, 2007
The Company currently operates in two industry segments. Its Orbit Instrument Division and its Tulip subsidiary are engaged in the design and manufacture of electronic components and subsystems and its ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation (the "Electronics Group"). Its Behlman subsidiary is engaged in the design and manufacture of commercial power units (the "Power Group"). The results of operations for the three months ended September 30, 2008 include the operations of ICS for the entire period since the acquisition was completed effective, December 31, 2007.
Consolidated net sales for the three month period ended September 30, 2008 increased by 10.1% to $6,951,000 from $6,312,000 for the three month period ended September 30, 2007 due to the inclusion of ICS in the current period and increased sales from the Power Group. Exclusive of ICS, net sales would have decreased by 7.7%. Sales from the Electronics Group increased by 9.0%, due to the inclusion of ICS in the current period and despite lower sales from the Company's Orbit Instrument Division and Tulip subsidiary. During the second quarter, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for several modifications to a product that was under a substantial contract with many of the units scheduled for shipment during 2008. As a result of this request, deliveries have been delayed and have resulted in significantly lower than expected revenues for the operating unit. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in the significant decrease in sales for the Electronics Group despite the inclusion of ICS. Sales from the Power Group increased by 23.3% for the quarter as compared to the prior year and is currently on track for a record year in bookings and revenue.
Gross profit, as a percentage of sales, for the three months ended September 30, 2008 decreased to 39.4% from 41.7% for the three month period ended September 30, 2007. This decrease resulted from a lower gross profit from the Company's Electronics Group due to a decrease in sales from both the Orbit Instrument Division and Tulip and despite a higher gross profit from the Power Group principally due to increased sales and to product mix.
Selling, general and administrative expenses increased by 18.5% to $2,508,000 for the three month period ended September 30, 2008 from $2,117,000 for the three month period ended September 30, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $403,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended September 30, 2008 increased to 36.1% from 33.5% for the three month period ended September 30, 2007 principally due to the aforementioned increase in costs along with the reduction in sales from the Electronics Segment.
Interest expense for the three months ended September 30, 2008 slightly increased to $79,000 from $76,000 for the three months ended September 30, 2007 due to an increase in the amounts owed to lenders in the current period due to the acquisition of ICS and despite a decrease in interest rates.
Investment and other income for the three month period ended September 30, 2008 decreased to $71,000 from $116,000 for the three-month period ended September 30, 2007 principally due to a decrease in the amounts invested during the current period and to a decrease in interest rates.
Net income before income tax provision decreased to $223,000 for the three months ended September 30, 2008 compared to $553,000 for the three months ended September 30, 2007. The decrease in income was principally due to the decrease in sales from both the Orbit Instrument Division and Tulip, a decrease in gross profit, an increase in selling, general and administrative expenses, a decrease in investment and other income and despite increased revenues and profitability from the Power Group.
The income tax provision for the three months ended September 30, 2008 was $8,000 consisting of state income taxes that cannot be offset by any state net operating loss carry-forwards.
As a result of the foregoing, net income for the three months ended September 30, 2008 was $215,000 compared to net income of $553,000 for the three months ended September 30, 2007.
Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended September 30, 2008 decreased to $501,000 for the three months ended September 30, 2008 compared to $770,000 for the three months ended September 30, 2007. Listed below is the EBITDA reconciliation to net income:
Three months ended
September 30,
2008 2007
---- ----
Net income $ 215,000 $553,000
Interest expense 79,000 76,000
Income tax expense 8,000 0
Depreciation and amortization 199,000 141,000
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EBITDA $501,000 $770,000
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EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of the Company's growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in significant interest expense and amortization expense. EBITDA is presented as additional information because the Company believes it is useful to our investors and management as a measure of cash generated by our business operations that will be used to service our debt and fund future acquisitions as well as provide an additional element of operating performance.
Nine month period endedSeptember 30, 2008 v.September 30, 2007
Consolidated net sales for the nine month period ended September 30, 2008 increased by 4.0% to $19,434,000 from $18,686,000 for the nine month period ended September 30, 2007 due to the inclusion of ICS in the current period and increased sales from the Power Group and despite lower sales from the Company's Orbit Instrument Division and Tulip subsidiary. Exclusive of ICS, net sales would have decreased by 15.4%. Sales from the Electronics Group decreased by 2.4% despite the inclusion of ICS in the current nine month period. During the current period, the Company's Orbit Instrument Division was verbally advised by one of its customers to provide support for several modifications to a product that was under a substantial contract with many of the units scheduled for shipment during 2008. As a result of this request, deliveries have been delayed and have resulted in significantly lower than expected revenues for the operating unit. In addition, the Orbit Instrument Division also experienced an unrelated customer delivery issue in the first quarter of 2008 that resulted in a shipment shortfall for that period, which has still not been resolved at September 30, 2008. The Company still expects this issue to be resolved by either year-end or the first quarter of 2009. This loss of sales, along with decreased sales from the Company's Tulip subsidiary resulted in the decrease in sales for the Electronics Group despite the inclusion of ICS in the current period. Sales from the Power Group increased by 21.5% for the current nine month period compared to the prior year as the segment is currently on track for a record year of revenue and profitability.
Gross profit, as a percentage of sales, for the nine months ended September 30, 2008 decreased to 39.6% from 43.3% for the nine month period ended September 30, 2007. This decrease resulted from a lower gross profit from the Company's Electronics Group due to a decrease in sales from both the Orbit Instrument Division and Tulip and despite a higher gross profit from the Power Group principally due to increased sales and to a less favorable product mix.
Selling, general and administrative expenses increased by 18.0% to $7,757,000 for the nine month period ended September 30, 2008 from $6,576,000 for the nine month period ended September 30, 2007 principally due to the inclusion of ICS's selling, general and administrative costs of $1,245,000 in the current period. Selling, general and administrative expenses, as a percentage of sales, for the nine month period ended September 30, 2008 increased to 39.9% from 35.2% for the nine month period ended September 30, 2007 principally due to the aforementioned increase in costs along with the reduction in sales from the Electronics Segment.
Interest expense for the nine months ended September 30, 2008 slightly increased to $261,000 from $258,000 for the nine months ended September 30, 2007 due to an increase in the amounts owed to lenders in the current period due to the acquisition of ICS that was offset by a decrease in interest rates.
Investment and other income for the nine month period ended September 30, 2008 decreased to $249,000 from $371,000 for the nine-month period ended September 30, 2007 principally due to a decrease in the amounts invested during the current period and to a decrease in interest rates.
Loss before income tax provision was $65,000 for the nine months ended September 30, 2008 compared to income before tax provision of $1,628,000 for the nine months ended September 30, 2007. The decrease in income was principally due to the decrease in sales from both the Orbit Instrument Division and Tulip, a decrease in gross profit, an increase in selling, general and administrative expenses, a decrease in investment and other income and despite increased revenues and profitability from the Power Group.
The income tax provision for the nine months ended September 30, 2008 was $15,000 compared to $25,000 for the nine months ended September 30, 2007 consisting of state income taxes that cannot be offset by any state net operating loss carry-forwards.
As a result of the foregoing, net loss for the nine months ended September 30, 2008 was $80,000 compared to net income of $1,603,000 for the nine months ended September 30, 2007.
Earnings before interest, taxes and depreciation and amortization (EBITDA) for the nine months ended September 30, 2008 decreased to $819,000 for the nine months ended September 30, 2008 compared to $2,305,000 for the nine months ended September 30, 2007. Listed below is the EBITDA reconciliation to net income:
Nine months ended
September 30,
2008 2007
---- ----
Net (loss) income $ (80,000) $1,603,000
Interest expense 261,000 258,000
Income tax expense 15,000 25,000
Depreciation and amortization 623,000 419,000
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EBITDA $819,000 $2,305,000
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Material Change in Financial Condition
Working capital decreased to $16,891,000 at September 30, 2008 compared to $18,167,000 at December 31, 2007. The ratio of current assets to current liabilities was 3.5 to 1 at September 30, 2008 compared to 4.1 to 1 at December 31, 2007.
Net cash used in operations for the nine month period ended September 30, 2008 was $1,767,000, primarily attributable to the net loss for the period, the non cash deferred income, an increase in accounts receivable, inventory and costs and estimated earnings in excess of billings, a decrease in income taxes payable and despite the non cash amortization of intangible assets and depreciation and the increase in accounts payable and customer advances. Net cash provided by operations for the nine-month period ended September 30, 2007 was $77,000, primarily attributable to the net income for the period, the non-cash amortization of intangible assets and stock based compensation and deferred tax expense that was partially offset by the increase in accounts receivable and inventory, the decrease in customer advances and deferred tax income.
Cash flows provided by investing activities for the nine month period ended
September 30, 2008 was $828,000, primarily attributable to the sale of
marketable securities that was partially offset by the purchase of marketable
securities, the purchase of property and equipment and additional costs
associated with the ICS acquisition. Cash flows used in investing activities
for the nine-month period ended September 30, 2007 was $321,000, attributable to
the purchase of marketable securities and property and equipment that was
partially offset by the sale of marketable securities.
Cash flows used in financing activities for the nine month period ended
September 30, 2008 was $1,086,000, primarily attributable to the repayment of
long term debt and the Company's line of credit and purchases of treasury stock
that was partially offset from loan proceeds from the line of credit. Cash
flows used in financing activities for the nine-month period ended September 30,
2007 was $885,000, attributable to the repayments of long term debt that was
partially offset by the issuance of long term debt and stock option exercises.
In December 2007, the Company entered into an amended $3,000,000 credit facility with a commercial lender secured by accounts receivable, inventory and property and equipment. In April 2005, the Company entered into a five-year $5,000,000 Term Loan Agreement to finance the acquisition of Tulip and its manufacturing affiliate("The Tulip Term Loan"). In December 2007, the Company entered into a five-year $4,500,000 Term Loan Agreement to finance the acquisition of ICS("The ICS Term Loan"). In connection with the new Term Loan entered into in December 2007, the interest rates on both Term Loan Agreements and the credit facility were amended to equal a certain percentage plus the one month LIBOR depending on a matrix related to a certain financial covenant. At September 30, 2008, the interest rate was equal to the sum of 1.50% plus the one-month LIBOR (3.93% at September 30, 2008). The credit facility will continue from year to year unless sooner terminated for an event of default including non-compliance with certain financial covenants. Principal payments under the two term loan facilities are approximately $113,000 per month.
As a result of lower profitability related to customer shipping delays described above, the Company was not in compliance with two of its financial covenant ratios at September 30, 2008. In November 2008, the Company's primary lender waived the covenant default of two of its financial ratios at September 30, 2008 and the Company renegotiated the financial covenant ratios for the quarterly reporting periods December 31, 2008 and March 31, 2009. Beginning June 30, 2009 the covenants will revert back to their original ratios with a modification to a certain financial ratio covenant definition. The lender instituted an unused line fee of .25% per annum, as the cost to the Company for the waiver and amendment to the loan agreements. In connection therewith, the interest rate on the Tulip Term Loan and Tulip Shareholder Note, increased to the sum of 2.50% plus the one month LIBOR and the interest rate on the ICS Term Loan and Line of Credit was increased to the sum of 2.25% plus the one month LIBOR.
During the third quarter and into October 2008, due to the worldwide credit crisis, there was a significant increase in LIBOR and the Company incurred increased interest expense near the end of the third quarter and in October, 2008. However, LIBOR rates have begun to decrease and are currently below rates in effect prior to when the credit crisis began. As a result, the interest rate increase referenced above may be mitigated somewhat by the decrease in LIBOR rates.
In April 2005, the Company entered into a five year $2,000,000 Promissory Note with the selling shareholders of Tulip at an interest rate of prime plus 2.00% (5.00% at September 30, 2008). Principal payments of $100,000 were made on a quarterly basis along with accrued interest. In June 2007, the Company refinanced the balance due on the Promissory Note of $1,050,000 with its primary commercial lender("Tulip Shareholder Note"). Under the terms of a new Term Loan, monthly payments of $35,000 will be made over a thirty-month period along with accrued interest at a rate of 1.50% plus the one-month LIBOR.
The Company's contractual obligations and commitments as of September 30, 2008, are summarized as follows:
Less than 1-2 3-5
Total One Year Years Years
----- ---------- ------ ------
Long-term debt $7,250,000 $1,777,000 $3,330,000 $2,143,000
Note Payable-bank 993,000 993,000 - -
Employment
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