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ORBT > SEC Filings for ORBT > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for ORBIT INTERNATIONAL CORP

Form 10-Q for ORBIT INTERNATIONAL CORP


14-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 our actual financial or operating results to be materially different from our 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 our most recent results. 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 our reports and registration statements filed with the Securities and Exchange Commission.

Executive Overview

Our net sales during the three and six months ended June 30, 2013 were $6,475,000 and $12,922,000, respectively, compared to $7,509,000 and $13,671,000 during the prior year three and six month periods, respectively. We recorded net income of $109,000 and $29,000 for the three and six months ended June 30, 2013, respectively, compared to net income of $199,000 and a net loss of $1,176,000 in the comparable 2012 periods, respectively. Despite the decrease in sales during the current three and six month periods, our net income did not materially change from the comparable periods in 2012, exclusive of the $1,194,000 charge taken in connection with the non-renewal of our former chief operating officer's employment contract in the prior year six month period. This was primarily the result of a change in product mix and cost cutting measures taken over the last several quarters.

Our backlog at June 30, 2013 was approximately $13,600,000 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 amount 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 8.4 to 1 current ratio at June 30, 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. In June 2013, our Credit Agreement was amended whereby (i) the expiration date on our credit facility was extended to July 1, 2015 and (ii) we are permitted to purchase up to $400,000 of our common stock in each year beginning July 1 and ending June 30 during the term of our Credit Agreement. Accordingly, as of June 30, 2013, our line of credit is now classified as a non-current liability. We were in compliance with the financial covenants contained in our Credit Agreement at June 30, 2013. In November 2012, our Board of Directors authorized management, in its discretion, to purchase up to $400,000 of our common stock. On March 6, 2013, our Board of Directors approved a 10b5-1 Plan through which we conducted our authorized stock buy back program. We repurchased all of the remaining shares available under our 10b5-1 Trading Plan during the second quarter of 2013 and we may put a new trading plan in place depending on industry conditions, share price and a determination of capital allocation factors.


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From November 8, 2012 to June 30, 2013, we purchased a total of approximately 116,000 shares of our common stock for total cash consideration of approximately $400,000 for an average price of $3.45 per share.

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 condensed 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.


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Deferred Tax Asset

At June 30, 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 continue our profitability or incur 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 condensed consolidated statements of operations.

Impairment of Goodwill

The balance of our goodwill, as of June 30, 2013, is $868,000 for Behlman. After applying ASU 2011-08, we performed a qualitative assessment on Behlman's goodwill at December 31, 2012. We 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 $56,000 and $152,000 for the six months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 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.


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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.

Marketable Securities

We currently have approximately $254,000 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.


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Results of Operations

Three month period ended June 30, 2013 v. June 30, 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 June 30, 2013 decreased by 13.8% to $6,475,000 from $7,509,000 for the three month period ended June 30, 2012, due primarily to lower sales from both our Electronics and Power Groups. Sales from our Electronics Group decreased by 22.7% due principally to lower sales from our ICS and TDL subsidiaries and despite an increase in sales from our Orbit Instrument Division. The decrease in sales at our ICS subsidiary was primarily due to the shipment of lower gross margin MK 437 sales in the prior year period. The decrease in sales at our TDL subsidiary was principally due to
(i) lower bookings for the first six months of 2013 as compared to the comparable period in 2012 and (ii) the absence of shipments in the current year period for a certain display used in the ground mobile marketplace. The increase in sales at our Orbit Instrument Division was primarily due to increased shipments pursuant to customer delivery schedules. Our Power Group recorded a slight decrease (1.6%) in sales during the current three month period as compared to the prior year period.

Gross profit, as a percentage of sales, for the three months ended June 30, 2013 increased to 38.6% from 37.7% for the three month period ended June 30, 2012.
The increase was the result of higher gross profit at our Electronics Group that was partially offset by lower gross profit at our Power Group. The increase in gross profit from our Electronics Group was principally due to higher gross profit at our TDL subsidiary and to a lesser extent our Orbit Instrument Division which was partially offset by lower gross profit at our ICS subsidiary. The increase in gross profit at our TDL subsidiary was principally due to a change in product mix, primarily the result of the gross margin associated with the shipment of displays used in a major helicopter program and despite lower sales in the current year period. The slight increase in gross profit at our Orbit Instrument Division was primarily the result of an increase in sales during the current year period. The decrease in gross margin at our ICS subsidiary was principally due to lower sales during the current year period and despite the shipment of lower gross margin MK 437 sales in the prior year period. The decrease in gross profit at our Power Group was principally due to slightly lower sales and a change in product mix during the current year period.

Selling, general and administrative expenses decreased by 8.5% to $2,355,000 for the three month period ended June 30, 2013 from $2,575,000 for the three month period ended June 30, 2012. The decrease was due to lower selling, general and administrative expenses from both our Electronics and Power Groups, as well as lower corporate costs. The decrease in selling, general and administrative expenses at our Electronics Group was primarily due to the departure of a senior officer whose duties were assumed by other management and also to a reduction in personnel at our ICS subsidiary. Our Power Group recorded a very slight reduction(less than 1%) in selling, general and administrative expenses for the current three month period. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended June 30, 2013 increased to 36.4% from 34.3% for the three month period ended June 30, 2012 principally due to a decrease in sales and despite a decrease in costs.


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Interest expense for the three months ended June 30, 2013 decreased to $15,000 from $36,000 for the three months ended June 30, 2012. In November 2012, we entered into a credit agreement with a 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 June 30, 2013 decreased to $2,000 from $4,000 for the three month period ended June 30, 2012 principally due to higher bond premium amortization expense in the current period.

Net income before taxes was $129,000 for the three months ended June 30, 2013 compared to $227,000 for the three months ended June 30, 2012. The decrease in income was principally due to a decrease in sales from both our Electronics and Power Groups which was partially offset by an increase in gross margin and a decrease in selling, general and administrative expenses and interest expense.

Income taxes for the three months ended June 30, 2013 and June 30, 2012 consist of $20,000 and $28,000, 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 income for the three months ended June 30, 2013 was $109,000 compared to net income of $199,000 for the three months ended June 30, 2012.

Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended June 30, 2013 decreased to $216,000 from $338,000 for three months ended June 30, 2012. Listed below is the EBITDA reconciliation to net income:

EBITDA is a Non-GAAP financial measure and should not be construed as an alternative to net income. An element of our 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 we believe 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
                                       June 30,
                                  2013          2012
Net income                      $ 109,000     $ 199,000
Interest expense                   15,000        36,000
Income tax expense                 20,000        28,000
Depreciation and amortization      72,000        75,000
EBITDA                          $ 216,000     $ 338,000

Six month period ended June 30, 2013 v. June 30, 2012

Consolidated net sales for the six month period ended June 30, 2013 decreased by 5.5% to $12,922,000 from $13,671,000 for the six month period ended June 30, 2012 due to lower sales from our Electronics Group that was partially offset by higher sales from our Power Group. Sales from our Electronics Group decreased by 12.1%, due principally to a decrease in sales from our ICS and TDL subsidiaries that was partially offset by an increase in sales at our Orbit Instrument Division. The decrease in sales at our ICS subsidiary was primarily due to the shipment of lower gross margin MK 437 sales in the prior year period. The decrease in sales at our TDL subsidiary was principally due to the absence of shipments in the current year period for a certain display used in the ground mobile marketplace. The increase in sales at our Orbit Instrument Division was principally due to increased shipments pursuant to customer delivery schedules. The increase in sales at our Power Group was principally due to an increase in shipments at our commercial division that was partially offset by a decrease in sales at our COTS division.

Gross profit, as a percentage of sales, for the six months ended June 30, 2013 increased to 38.6% from 38.2% for the six month period ended June 30, 2012. This increase was primarily the result of higher gross profit from our Electronics Group that was partially offset by lower gross profit from our Power Group. The increase in gross profit at our Electronics Group was principally due to higher gross profit at our Orbit Instrument Division, primarily due to higher sales and a change in product mix, that was partially offset by lower gross profit at our ICS and TDL subsidiaries primarily the result of lower sales and despite the shipment of lower gross margin MK 437 sales at our ICS subsidiary in the prior year period. The decrease in gross profit at our Power Group was principally due to a change in product mix despite the increase in sales during the current year period.

Selling, general and administrative expenses decreased by 5.5% to $4,886,000 for the six month period ended June 30, 2013 from $5,172,000 for the six month period ended June 30, 2012. The decrease was primarily due to lower selling, general and administrative expenses from our Electronics Group, as well as lower corporate costs, that was partially offset by slightly higher(less than 1%) expenses at our Power Group. The decrease in selling, general and administrative expenses at our Electronics Group was primarily due to the departure of a senior officer whose duties were assumed by other management and also to a reduction in personnel at our ICS subsidiary. Selling, general and administrative expenses, as a percentage of sales, for both the six month period ended June 30, 2013 and 2012 was 37.8%, attributable to a decrease in sales which was offset by a decrease in costs.


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During the first quarter of 2012, we reached a decision that made it probable that the employment agreement of our former 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.

Interest expense for the six months ended June 30, 2013 decreased to $32,000 from $70,000 for the six months ended June 30, 2012. In November 2012, we entered into a credit agreement with a 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 six month period ended June 30, 2013 decreased to $5,000 from $97,000 for the six month period ended June 30, 2012. The decrease was principally due to an $85,000 gain recognized during the prior period relating to the remaining unamortized deferred gain on the sale of our building in 2001 and also to a $2,000 loss on the sale of marketable securities and higher bond premium amortization expense during the current period.

Net income before taxes was $75,000 for the six months ended June 30, 2013 compared to a net loss before taxes of $1,118,000 for the six months ended June 30, 2012. The increase in profitability 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, a decrease in selling, general and administrative expenses and interest expense and an increase in gross margin that was partially offset by a decrease in sales at both our Electronics and Power Groups and a decrease in investment and other income.

Income taxes for the six months ended June 30, 2013 and June 30, 2012 consist of $46,000 and $58,000, 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 income for the six months ended June 30, 2013 was $29,000 compared to a net loss of $1,176,000 for the six months ended June 30, 2012.

Earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) for the six months ended June 30, 2013 increased to $247,000 from a loss of $907,000 for the six months ended June 30, 2012. Listed below is the EBITDA reconciliation to net income:

                                     Six months ended
                                         June 30,
                                  2013            2012
Net Income (loss)               $  29,000     $ (1,176,000 )
Interest expense                   32,000           70,000
Income tax expense                 46,000           58,000
Depreciation and amortization     140,000          141,000
EBITDA                          $ 247,000     $   (907,000 )


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Material Change in Financial Condition

Working capital increased to $17,167,000 at June 30, 2013 compared to $14,935,000 at December 31, 2012. The ratio of current assets to current liabilities increased to 8.4 to 1 at June 30, 2013 compared to 3.4 to 1 at December 31, 2012. The increase in working capital was primarily attributable to the reclassification of our line of credit as a non-current liability which was partially offset by the purchase of treasury stock and property and equipment.

Net cash provided by operating activities for the six month period ended June 30, 2013 was $1,459,000, primarily attributable to a decrease in accounts receivable and inventory and the non-cash depreciation and stock based compensation which was partially offset by a decrease in accounts payable and the liability associated with the non-renewal of a senior officer contract and an increase in costs and earnings in excess of billings on uncompleted contracts. Net cash used in operating activities for the six month period ended June 30, 2012 was $1,531,000, primarily attributable to the net loss for the period, an increase in inventory and costs and estimated earnings in excess of billings on uncompleted contracts, the decrease in accrued expenses and taxes payable and despite the decrease in accounts receivable and other current . . .

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