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ORBT > SEC Filings for ORBT > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for ORBIT INTERNATIONAL CORP


15-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Forward Looking Statements

Statements in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document are certain statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may", "will", "potential", "opportunity", "believes", "belief", "expects", "intends", "estimates", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission.

Executive Overview

We recorded an increase in revenue and a decrease in our net loss for the three months ended March 31, 2013 as compared to the same period in 2012. Our revenue increase was due to an increase in sales from both our Electronics and Power Groups. The decrease in our net loss was primarily attributable to a $1,194,000 charge taken in the prior year period relating to the non-renewal of our former chief operating officer's contract. The decrease in our net loss was also attributable, to a lesser extent, to an increase in profitability at our Power Group and a decrease in the net loss at our Electronics Group.

Our backlog at March 31, 2013 was approximately $14,700,000 compared to $15,900,000 at December 31, 2012 due to a lower backlog at both our Electronics and Power Groups. There is no seasonality to our 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 number of business opportunities and while we are confident that we will receive many of the orders we are pursuing, there can be no assurance as to the ultimate receipt and timing of these orders.

Our financial condition remains strong as evidenced by our 3.9 to 1 current ratio at March 31, 2013. During November 2012, we entered into a $6,000,000 line of credit facility with a new lender. This line of credit was used to pay off, in full, all of our obligations to our former primary lender and to provide for our general working capital needs. The new credit facility expires November 8, 2013. We were in compliance with the financial covenants contained in the New Credit Agreement at March 31, 2013. Under the terms of our New Credit Agreement entered into November 8, 2012, we are permitted to purchase up to an additional $400,000 of our common stock during the term of our New Credit Agreement. In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to this dollar amount of our common stock. On March 6, 2013, our Board of Directors approved a 10b5-1 Plan through which we will conduct our currently authorized stock buy back program. From the commencement of the New Credit Agreement to May 12, 2013, we purchased a total of approximately 76,000 shares of our common stock for total cash consideration of approximately $263,000 for an average price of $3.48 per share.


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Critical Accounting Policies

The discussion and analysis of our financial condition and the results of operations are based on our financial statements and the data used to prepare them. Our 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 our deferred tax asset, goodwill and intangible assets impairment, valuation of share-based compensation, revenue and cost recognition on long-term contracts accounted for under the percentage-of-completion method and other than temporary impairment on marketable securities. 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. We believe 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 (average cost method and specific identification) or market. Inventory items are reviewed regularly for excess and obsolete inventory based on an estimated forecast of product demand. Demand for our 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 we make every effort to insure the accuracy of our 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 our inventory and operating results could be affected, accordingly. However, world events which have forced our country into various conflicts have resulted in increased usage of hardware and equipment which are now in need of repair and refurbishment. This could lead to increased product demand as well as the use of some older inventory items that we had previously determined obsolete. In addition, recently announced reductions in defense spending may result in deferral or cancellation of purchases of new equipment, which may require refurbishment of existing equipment.

Deferred Tax Asset

At March 31, 2013, we 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 $5,000,000 and $6,000,000, respectively that expire from 2018 through 2032. We record a valuation allowance to reduce our deferred tax asset when it is more likely than not that a portion of the amount may not be realized. We estimate our valuation allowance based on an estimated forecast of our future profitability. Any significant changes in future profitability resulting from variations in future revenues or expenses could affect the valuation allowance on our deferred tax asset and operating results could be affected accordingly. We will evaluate the possibility of changing some or all of our valuation allowance relating to our deferred tax asset should we become profitable or incur further losses in the future. The increase or reduction of some or all of our valuation allowance would create a deferred tax expense or benefit, resulting in a decrease or increase to net income in our consolidated statements of operations.


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Impairment of Goodwill

The balance of our goodwill, as of March 31, 2013, is $868,000 for Behlman. After applying ASU 2011-08, the Company performed a qualitative assessment on Behlman's goodwill at December 31, 2012. The Company concluded as of December 31, 2012 that the fair value of Behlman was more likely than not greater than its carrying amount. This assessment was based on certain factors, such as: i) Behlman's bookings and revenue in 2012 (approximately $12.5 million and $12.4 million, respectively), ii) Behlman's net income (approximately $2.8 million) in 2012, iii) Behlman's backlog at December 31, 2012 of approximately $8.1 million and iv) the result of our 2010 quantitative goodwill impairment test under which Behlman's fair value at December 31, 2010 exceeded its carrying amount by approximately 27%.

Share-Based Compensation

We account for share-based compensation awards by recording compensation based on the fair value of the awards on the date of grant and expensing such compensation over the vesting periods of the awards, which is generally one to ten years. Total share-based compensation expense was $28,000 and $52,000 for the three months ended March 31, 2013 and 2012, respectively. During the three months ended March 31, 2013, 130,000 shares of restricted stock were awarded to senior management. During the comparable period in 2012, no shares of restricted stock or stock options were granted.

Revenue and Cost Recognition

We recognize a substantial portion of our revenue upon the delivery of product. We recognize such revenue when title and risk of loss are transferred to our customer and when there is: i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, ii) the selling price is fixed and determinable, iii) collection of the customer receivable is deemed probable, and iv) we do not have any continuing non-warranty obligations. However, for certain products, 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 the loss is identified. Costs and estimated earnings in excess of billings on uncompleted contracts represent an asset that will be liquidated in the normal course of contract completion, which at times may require more than one year. The components of costs and estimated earnings in excess of billings on uncompleted contracts are the sum of the related contract's direct material, direct labor, and manufacturing overhead and estimated earnings less accounts receivable billings.


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Marketable Securities

We currently have approximately $261,000 invested in corporate bonds. We treat our investments as available-for-sale which requires us to assess our portfolio each reporting period to determine whether declines in fair value below book value are considered to be other than temporary. We must first determine that we have both the intent and ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost. In assessing whether the entire amortized cost basis of the security will be recovered, we compare the present value of future cash flows expected to be collected from the security (determination of fair value) with the amortized cost basis of the security. If the impairment is determined to be other than temporary, the investment is written down to its fair value and the write-down is included in earnings as a realized loss, and a new cost is established for the security. Any further impairment of the security related to all other factors is recognized in other comprehensive income. Any subsequent recovery in fair value is not recognized until the security either is sold or matures.

We use several factors in our determination of the cash flows expected to be collected including: i) the length of time and extent to which market value has been less than cost; ii) the financial condition and near term prospects of the issuer; iii) whether a decline in fair value is attributable to adverse conditions specifically related to the security or specific conditions in an industry; iv) whether interest payments continue to be made and v) any changes to the rating of the security by a rating agency.

Results of Operations

Three month period ended March 31, 2013 v. March 31, 2012

We currently operate in two industry segments. Our Orbit Instrument Division and our TDL subsidiary are engaged in the design and manufacture of electronic components and subsystems and our ICS subsidiary performs system integration for Gun Weapons Systems and Fire Control Interface as well as logistics support and documentation (which collectively comprise our "Electronics Group"). Our Behlman subsidiary is engaged in the design and manufacture of commercial power units and COTS power solutions (which comprises our "Power Group").

Consolidated net sales for the three month period ended March 31, 2013 increased by 4.6% to $6,447,000 from $6,162,000 for the three month period ended March 31, 2012. The increase was principally due to increases of 2.6% and 7.1% from both our Electronics and Power Groups, respectively. The increase in sales from our Electronics Group was primarily attributable to an increase in sales from our Orbit Instrument Division and our ICS subsidiary that was partially offset by a decrease in sales at our TDL subsidiary. The increase in sales at our Orbit Instrument Division was primarily due to an increase in shipments pursuant to customer delivery schedules resulting from higher bookings during the 2012 year as compared to the 2011 year. The decrease in sales at our TDL subsidiary was primarily due to a decrease in shipments pursuant to customer delivery schedules. The increase in sales at our Power Group was principally due to an increase in shipments at both its commercial and COTS divisions primarily due to customer delivery schedules.


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Gross profit, as a percentage of sales, for the three months ended March 31, 2013 decreased slightly to 38.6% from 38.7% for the three month period ended March 31, 2012. The decrease was primarily the result of lower gross profit from our Electronics Group (28.2% in the current year period compared to 29.1% in the prior year period) that was partially offset by slightly higher gross profit from our Power Group (48.7% in the current year period compared to 48.5% in the prior year period). The decrease in gross profit from our Electronics Group was principally due to lower gross profit from our TDL and ICS subsidiaries that was partially offset by higher gross profit at our Orbit Instrument Division. The decrease in gross profit at our TDL subsidiary was primarily due to lower sales and higher material costs principally due to the shipment of a prototype order during the current year period. The decrease in gross profit at our ICS subsidiary was primarily due to higher estimated costs relating to its Signal Data Converter order which is accounted for under the percentage of completion method. The increase in gross profit at our Orbit Instrument Division was principally due to a change in product mix and higher sales during the current year period. The increase in gross profit from our Power Group was principally due to operating leverage inherent in our business due to the increase in sales during the current period.

Selling, general and administrative expenses decreased by 2.5% to $2,531,000 for the three month period ended March 31, 2013 from $2,597,000 for the three month period ended March 31, 2012 principally due to lower selling, general and administrative expenses from our Electronics Group that was partially offset by slightly higher corporate costs and selling, general and administrative expenses from our Power Group. The decrease in selling, general and administrative expense at our Electronics Group during the current year period was principally due to a reduction in personnel at our ICS subsidiary. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended March 31, 2013 decreased to 39.3% from 42.1% for the three month period ended March 31, 2012 principally due to the increase in sales and a decrease in expenses.

During the first quarter of 2012, we reached a decision that made it probable that the employment agreement of our chief operating officer would not be renewed, which would effectively terminate his employment as of July 31, 2012. Pursuant to the terms of his existing agreement, we recorded an expense of $1,194,000 for estimated costs associated with the contract non-renewal.


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Interest expense for the three months ended March 31, 2013 decreased to $17,000 from $34,000 for the three months ended March 31, 2012. In November 2012, we entered into a new credit agreement with a new commercial lender pursuant to which we established a committed line of credit of up to $6,000,000. This line of credit was used to pay off all of our obligations (term debt and line of credit) to our former primary lender. The decrease in interest expense was principally due to the pay off of our term debt, a lower interest rate on our new line of credit and despite an increase in amounts owed under our line of credit.

Investment and other income for the three month period ended March 31, 2013 decreased to $3,000 from $93,000 for the three-month period ended March 31, 2012 principally due to an $85,000 gain recognized during the prior year quarter relating to the remaining unamortized deferred gain on the sale of our building in 2001 and also due to a $2,000 loss on the sale of a corporate bond during the current period.

Net loss before income tax provision was $54,000 for the three months ended March 31, 2013 compared to a net loss before income tax provision of $1,345,000 for the three months ended March 31, 2012. The net loss decrease was principally due to a $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer's contract in the prior year period, an increase in sales and gross profit from our Power Group, a decrease in selling, general and administrative expenses and a decrease in interest expense that was partially offset by a decrease in investment and other income and a slight decrease in gross profit at our Electronics Group.

Income taxes for the three months ended March 31, 2013 and March 31, 2012 consist of $26,000 and $30,000, respectively, in state income and Federal minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.

As a result of the foregoing, net loss for the three months ended March 31, 2013 was $80,000 compared to a net loss of $1,375,000 for the year ended March 31, 2012.

Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended March 31, 2013 increased to $31,000 from a loss of $1,245,000 for three months ended March 31, 2012. Listed below is the EBITDA reconciliation to net income (loss):

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.


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                                    Three months ended
                                        March 31,
                                  2013            2012
Net loss                        $ (80,000 )   $ (1,375,000 )
Interest expense                   17,000           34,000
Income tax expense                 26,000           30,000
Depreciation and amortization      68,000           66,000
EBITDA                          $  31,000     $ (1,245,000 )

Material Change in Financial Condition

Working capital increased slightly to $14,972,000 at March 31, 2013 compared to $14,935,000 at December 31, 2012. The ratio of current assets to current liabilities was 3.9 to 1 at March 31, 2013 compared to 3.4 to 1 at December 31, 2012.

Net cash provided by operating activities for the three month period ended March 31, 2013 was $1,391,000, primarily attributable to a decrease in accounts receivable and inventory, an increase in accounts payable and the non-cash depreciation and stock based compensation that was partially offset by the net loss for the period, a decrease in customer advances, accrued expenses and the liability associated with the non-renewal of a senior officer contract. Net cash used in operating activities for the three month period ended March 31, 2012 was $538,000, which was primarily attributable to the net loss for the period, the increase in inventory and the decrease in accrued expenses and despite the increase in the liability associated with the non-renewal of senior officers' contracts and accounts payable, and a decrease in accounts receivable and the non-cash depreciation and stock based compensation.

Cash flows used in investing activities for the three month period ended March 31, 2013 was $134,000, attributable to the purchase of fixed assets and marketable securities that was partially offset by the sale of marketable securities. Cash flows used in investing activities for the three month period ended March 31, 2012 was $151,000, attributable to the purchase of fixed assets.

Cash flows used in financing activities for the three month period ended March 31, 2013 was $688,000, attributable to the repayment of note payable-bank and long term debt and the purchase of treasury stock. Cash flows used in financing activities for the three month period ended March 31, 2012 was $570,000, primarily attributable to the repayment of long term debt and the purchase of treasury stock which was partially offset by the proceeds from the issuance of long term debt.

The New Credit Agreement contains customary affirmative and negative covenants and certain financial covenants. Additionally, available borrowings under the line of credit are subject to a borrowing base of eligible accounts receivable and inventory. All outstanding borrowings under the line of credit are accelerated and become immediately due and payable (and the Line of Credit terminates) in the event of a default, as defined, under the New Credit Agreement. We were in compliance with the financial covenants contained in the New Credit Agreement at March 31, 2013.


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Our existing capital resources, including our bank credit facility (which we expect to renew in 2013) and our cash flow from operations, are expected to be adequate to cover our cash requirements for the foreseeable future.

Under the terms of our New Credit Agreement, we are permitted to purchase up to an additional $400,000 of our common stock during the term of the Agreement. In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to this dollar amount of common stock. From the start of the New Credit Agreement on November 8, 2012 to May 12, 2013, we purchased a total of approximately 76,000 of our common shares for total cash consideration of approximately $263,000 for an average price of $3.48 per share.

On March 6, 2013, our Board of Directors approved a 10b5-1 Plan (the "Plan") through which we will conduct our currently authorized stock buy back program. We have authorized a total of approximately $300,000 which may be devoted to repurchases made pursuant to the Plan. As of May 12, 2013, we had approximately $137,000 available for repurchases under the Plan.

Inflation has not materially impacted the operations of our Company.

Certain Material Trends

Backlog at March 31, 2013 was $14.7 million compared to $21.2 million at March 31, 2012. The decrease in backlog at March 31, 2013 from March 31, 2012 was attributable to lower backlogs at both our Electronics and Power Groups. The decrease in the backlog was attributable to several significant orders booked by the Electronics Group in the first quarter of the prior year under programs for which orders are again expected in the current year but have not yet been received to date.

Our backlog at March 31, 2013 does not include approximately $4.2 million of orders that have not yet been funded against a base contract award for approximately $5.8 million received by ICS for its Signal Data Converter ("SDC"). Our backlog at March 31, 2013, inclusive of the full base contract award for the SDC would be $18.9 million. The $4.2 million remainder of the contract was expected to be received during the first quarter of 2013 so that all shipments would be completed by the end of 2013. However, ICS was notified by its customer that orders and deliveries under this contract will be spread over a four year period. The initial production order is expected in the third quarter of 2013 for approximately $800,000 to $900,000.

Bookings at our Orbit Instrument Division exceeded $10,000,000 in 2012 due to significant orders for our Remote Control Units (RCU) and FAA keyboards that were expected in 2011 but were received in the first quarter of 2012 along with orders received for our Color Programmable Entry Panels (CPEP). We again received orders for our RCU in the first quarter of 2013 but have not yet received new orders in 2012 for our FAA keyboards and our CPEP's. FAA keyboard and CPEP orders are expected in the second or third quarter of 2013. There has been a significant amount of bid and proposal activity for our Orbit Instrument Division on both legacy products and new opportunities. Information from our customers related to all legacy opportunities is that the timing of the receipt of these awards is uncertain but the business remains intact. Our Orbit Instrument Division recorded improved gross margins in the first quarter of 2013 compared to 2012. We expect that these margins can be maintained in 2013 but only if certain outstanding proposals can be converted to purchase orders on a timely basis so that revenue levels can be sustained.


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ICS last received a follow-on award for its MK-119 Gun Console System for 2012 delivery. Future orders on this program for foreign military sales are expected no earlier than 2014. ICS developed and shipped three prototype SDC units during the second quarter of 2011 and received an order for two additional prototype SDCs, one that was delivered in the second quarter of 2012 and the other delivered during the third quarter of 2012. In April 2012, ICS received a follow-on base contract award mentioned earlier for its SDC for approximately $5,758,000. ICS received initial orders of $1,597,000 against this contract. The remainder of this contact is expected to be awarded over a four year period. ICS is currently working on other business opportunities and has took certain cost . . .

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