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

Show all filings for ORBIT INTERNATIONAL CORP

Form 10-Q for ORBIT INTERNATIONAL CORP


14-Nov-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

During the three months ended September 30, 2013, we recorded a 22.3% decrease in sales and a decrease in net income to $127,000 from net income of $763,000 in the prior year period. The decrease in net income was principally due to the decrease in sales but was partially offset by a slight decrease in selling, general and administrative expenses and a decrease in interest expense. Although we recorded a significant decrease in sales, gross margin decreased only slightly (.2%) because of better product mix, particularly at our Orbit Instrument Division and TDL subsidiary. During the nine months ended September 30, 2013, we recorded an 11.6% decrease in sales but our net income increased to $156,000 from a loss of $413,000 during the prior year nine month period. The increase in profitability was primarily attributable to a $1,194,000 charge taken in the prior year in connection with the non-renewal of our former chief operating officer's employment contract. The increase in profitability during the current nine month period was also attributable to a decrease in selling, general and administrative expenses and interest expense and a slight increase in gross margin which was partially offset by a decrease in sales.

Our backlog at September 30, 2013 was approximately $12,700,000 compared to $17,100,000 at September 30, 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 continue to pursue 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.


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Our financial condition remains strong as evidenced by our 9.8 to 1 current ratio at September 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 September 30, 2013, our line of credit is classified as a non-current liability. We were in compliance with the financial covenants contained in our Credit Agreement at September 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 shares available under our stock buy back program (including the related 10b5-1 Plan) during the first and second quarters of 2013. From November 8, 2012 to June 20, 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. On November 6, 2013, our Board of Directors authorized management to purchase up to $400,000 of our common stock pursuant to a buy back program. In conjunction with the buy back program, our Board of Directors authorized management to enter into a 10b5-1 Plan through which we will be permitted to repurchase up to $200,000 of our common stock. Management is authorized to repurchase up to the remaining $200,000 of common stock under the $400,000 buy back program outside of the 10b5-1 Plan.

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, impairment of goodwill, 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 ensure 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 September 30, 2013, we had an alternative minimum tax credit of approximately $573,000 with no limitation on the carry-forward period and approximately $6,000,000 of both Federal and state net operating loss carry-forwards 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

As of September 30, 2013, our goodwill was $868,000, all of which was attributable to our Behlman subsidiary. 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 $84,000 and $196,000 for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 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 $248,000 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 September 30, 2013 v. September 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 September 30, 2013 decreased by 22.3% to $6,109,000 from $7,864,000 for the three month period ended September 30, 2012, due primarily to lower sales from our Electronics Group and despite higher sales from our Power Group. Sales from our Electronics Group decreased by 36.3% due principally to lower sales from our Orbit Instrument Division and our ICS subsidiary and to a lesser extent lower sales from our TDL subsidiary. The decrease in sales at our Orbit Instrument Division was primarily due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods. The decrease in sales at our ICS subsidiary was principally due to a decrease in revenue relating to our Signal Data Converter ("SDC") order, which is recognized under the percentage of completion method, and was completed during the current year quarter. Due to a delay in receiving the follow-on SDC production order, shipments will not commence until the 2014 calendar year. The decrease in sales at our TDL subsidiary was principally due to (i) lower bookings for the first nine 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. Sales from our Power Group increased by 3.2% due to an increase in sales from its commercial division which was partially offset by a decrease in sales at its COTS division. The increase in sales from its commercial division was principally due to increased shipments pursuant to customer delivery schedules. The decrease in sales from its COTS division was principally due to a decrease in shipments pursuant to customer delivery schedules as a result of lower bookings in prior periods.

Gross profit, as a percentage of sales, for the three months ended September 30, 2013 slightly decreased to 38.7% from 38.9% for the three month period ended September 30, 2012. The decrease was the result of lower gross margin at our Electronics Group that was partially offset by higher gross margin at our Power Group. The decrease in gross margin from our Electronics Group was principally due to lower gross margin at our ICS subsidiary which was partially offset by higher gross margin at our TDL subsidiary and slightly higher gross margin at our Orbit Instrument Division. The decrease in gross margin at our ICS subsidiary was principally due to lower sales during the current year period resulting from a decrease in revenue relating to our SDC order. The higher gross margins at both our Orbit Instrument Division and TDL subsidiary were primarily due to lower material consumption costs during the current year period as a result of a change in product mix and despite the decrease in sales. The increase in gross margin at our Power Group was principally due to higher sales during the three months ended September 30, 2013 as compared to the prior year period.


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Selling, general and administrative expenses decreased slightly to $2,233,000 for the three month period ended September 30, 2013 from $2,255,000 for the three month period ended September 30, 2012. The decrease was principally due to slightly lower corporate costs and lower selling, general and administrative expenses from our Electronics Group that was partially offset by an increase in selling, general and administrative 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. The increase in selling, general and administrative expenses at our Power Group was primarily due to an increase in professional fees. Selling, general and administrative expenses, as a percentage of sales, for the three month period ended September 30, 2013 increased to 36.6% from 28.7% for the three month period ended September 30, 2012 principally due to a decrease in sales and despite the slight decrease in costs.

Interest expense for the three months ended September 30, 2013 decreased to $14,000 from $31,000 for the three months ended September 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 September 30, 2013 increased to $6,000 from $5,000 for the three month period ended September 30, 2012 principally due to the sale of a corporate bond during the current year period.

Income before taxes was $125,000 for the three months ended September 30, 2013 compared to $778,000 for the three months ended September 30, 2012. The decrease in income was principally due to a decrease in sales at our Electronics Group which was partially offset by an increase in sales at our Power Group, a decrease in selling, general and administrative expenses and a decrease in interest expense.

Income tax (benefit) expense for the three months ended September 30, 2013 and September 30, 2012 consist of ($2,000) and $15,000, 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 September 30, 2013 was $127,000 compared to net income of $763,000 for the three months ended September 30, 2012.

Earnings before interest, taxes and depreciation and amortization (EBITDA) for the three months ended September 30, 2013 decreased to $217,000 from $882,000 for three months ended September 30, 2012. Listed below is the EBITDA reconciliation to net income:


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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 our growth strategy has been through strategic acquisitions which have been substantially funded through the issuance of debt. This has resulted in additional interest 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.

                                  Three months ended
                                     September 30,
                                  2013          2012
Net income                      $ 127,000     $ 763,000
Interest expense                   14,000        31,000
Income tax (benefit) expense       (2,000 )      15,000
Depreciation and amortization      78,000        73,000
EBITDA                          $ 217,000     $ 882,000

Nine month period ended September 30, 2013 v. September 30, 2012

Consolidated net sales for the nine month period ended September 30, 2013 decreased by 11.6% to $19,031,000 from $21,535,000 for the nine month period ended September 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 22.0%, due to a decrease in sales from our Orbit Instrument Division and TDL and ICS subsidiaries. The decrease in sales at our Orbit Instrument Division was principally due to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods. The decrease in sales at our ICS subsidiary was primarily due to the absence of MK 437 sales and a decrease in revenue relating to our SDC order in the current year period. The decrease in sales at our TDL subsidiary was principally due to (i) lower bookings for the first nine 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. Sales from our Power Group increased by 2.8%, due to an increase in sales from its commercial division and despite a decrease in sales from its COTS division. The increase in sales from its commercial division was principally due to an increase in shipments pursuant to customer delivery schedules. The decrease in sales at its COTS division was primarily related to a decrease in shipments pursuant to customer delivery schedules resulting from lower bookings in prior periods.

Gross profit, as a percentage of sales, for the nine months ended September 30, 2013 slightly increased to 38.6% from 38.4% for the nine month period ended September 30, 2012. This increase was primarily the result of a greater percentage of higher margin Power Group sales in the current year period; however, gross margin did decrease at both our Electronics and Power Groups in the current year period. The decrease at our Electronics Group was principally due to lower gross margins at our TDL and ICS subsidiaries primarily due to lower sales during the current year period. The increase in gross margin at our Orbit Instrument Division was principally due to lower material consumption as a result of a change in product mix in the current year period. The decrease in gross margin at our Power Group was primarily due to a change in product mix despite an increase in sales during the current year period.


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Selling, general and administrative expenses decreased to $7,119,000 for the nine month period ended September 30, 2013 from $7,427,000 for the nine month period ended September 30, 2012. The decrease was primarily due to an 8.2% decrease in selling, general and administrative expenses from our Electronics Group, as well as lower corporate costs, that was partially offset by a 2.3% increase in 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. The increase in selling, general and administrative expenses at our Power Group was principally due to an increase in selling expenses and professional fees. Selling, general and administrative expenses, as a percentage of sales, for the nine month period ended September 30, 2013 increased to 37.4% from 34.5% for the nine month period ended September 30, 2012 principally due to a decrease in sales and despite the decrease in costs.

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 effectively terminated 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 nine months ended September 30, 2013 decreased to $46,000 from $101,000 for the nine months ended September 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 nine month period ended September 30, 2013 decreased to $11,000 from $102,000 for the nine month period ended September 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 higher bond premium amortization expense during the current period.

Income before taxes was $200,000 for the nine months ended September 30, 2013 compared to a loss before taxes of $340,000 for the nine months ended September 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, an increase in sales at our Power Group that was partially offset by a decrease in sales at our Electronics Group and a decrease in investment and other income.

Income taxes for the nine months ended September 30, 2013 and September 30, 2012 consist of $44,000 and $73,000, respectively, in state income and Federal minimum taxes that cannot be offset by any state or Federal net operating loss carry-forwards.


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As a result of the foregoing, the net income for the nine months ended September 30, 2013 was $156,000 compared to a net loss of $413,000 for the nine months ended September 30, 2012.

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